1.4.4 Costs of Production — Practice Questions

Ten original multiple-choice questions on the costs of production, written to the style and difficulty of AQA Paper 3 Section A. Several are calculations from a cost schedule. Every question carries a full worked model answer.

10 questions AQA A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 1.4.4 Costs of Production revision notes.

1. 1. Which one of the following is most likely to be a fixed cost for a bakery?

   Definition in context

   Select one answer

   A Electricity used to run the ovens.

   B Flour and yeast used in baking.

   C Rent on the premises, paid monthly.

   D Wages of staff paid by the hour.
   Show model answer

   Answer: C (Rent on the premises, paid monthly.). A fixed cost does not vary with output: it is incurred at the same level whether the bakery produces one loaf or a thousand, and it is still payable if output is zero. Rent is the standard example — the landlord charges the same whatever comes out of the ovens.

   Why the other options are wrong

   • A — Running the ovens for longer to bake more bread uses more electricity, so this cost rises directly with output. That makes it variable.
   • B — Ingredients are the clearest variable cost of all: every extra loaf requires more flour and yeast.
   • D — Hourly wages are variable, because more output requires more staff hours. Note that salaried staff on fixed annual contracts would be a fixed cost — how labour is paid decides which category it falls into.

2. 2. Table 1 shows a firm's costs at four levels of output.
   Using Table 1, the average total cost of producing 200 units is

   Data interpretation

   Table 1: Total fixed and total variable costs at four output levels

   Output (units)	Total fixed cost	Total variable cost
   0	£600	£0
   100	£600	£400
   200	£600	£900
   300	£600	£1,650

   Select one answer

   A £3.00

   B £4.50

   C £7.50

   D £15.00
   Show model answer

   Answer: C (£7.50). Average total cost is total cost divided by output, so build the total first.
   Total cost at 200 units = £600 + £900 = £1,500.
   ATC = £1,500 ÷ 200 = £7.50.
   It is worth seeing that this splits into average fixed cost (£600 ÷ 200 = £3.00) and average variable cost (£900 ÷ 200 = £4.50), which of course sum to £7.50.

   Why the other options are wrong

   • A — £3.00 is the average fixed cost at this output. It leaves out the variable costs entirely.
   • B — £4.50 is the average variable cost. It leaves out the fixed costs, which are just as real.
   • D — £15.00 divides the correct total cost of £1,500 by 100 rather than 200 — the wrong row's output.

3. 3. A firm's total cost rises from £8,400 to £9,000 when its output increases from 300 to 350 units. Its marginal cost over that range is

   Calculation

   Select one answer

   A £12.00

   B £25.71

   C £28.00

   D £600.00
   Show model answer

   Answer: A (£12.00). Marginal cost is the change in total cost divided by the change in output.
   Change in total cost: £9,000 − £8,400 = £600.
   Change in output: 350 − 300 = 50 units.
   MC = £600 ÷ 50 = £12.00 per unit.
   The division by the change in quantity is what makes it a per-unit figure, and it is the step most often skipped.

   Why the other options are wrong

   • B — £9,000 ÷ 350 = £25.71 is the average total cost at the higher output, not the cost of the extra units.
   • C — £8,400 ÷ 300 = £28.00 is the average total cost at the lower output. Notice that average cost is falling here while marginal cost is well below it — which is exactly the relationship you would expect.
   • D — £600 is the total extra cost of all 50 units. Dividing by the change in output is what converts it into a marginal figure.

4. 4. A firm has fixed costs of £9,000 a month. When it produces 750 units in a month, its average fixed cost is

   Calculation

   Select one answer

   A £12, and it stays the same as output rises.

   B £12, and it falls as output rises.

   C £9,000, and it stays the same as output rises.

   D £9,000, and it falls as output rises.
   Show model answer

   Answer: B (£12, and it falls as output rises.). Average fixed cost is total fixed cost divided by output.
   AFC = £9,000 ÷ 750 = £12 per unit.
   Because the numerator is a constant and the denominator grows, AFC falls continuously as output rises — at 1,500 units it would be £6, at 3,000 units £3. This is the effect firms mean when they talk about spreading their overheads, and it is why average total cost falls steeply at low levels of output.

   Why the other options are wrong

   • A — The figure is right but the behaviour is not. Total fixed cost stays the same as output rises; average fixed cost does not, because the same total is being divided by an ever larger output.
   • C — £9,000 is the total fixed cost, not the average. And this option makes the same mistake as A about how it behaves.
   • D — £9,000 is again the total rather than the per-unit figure, although the direction of change is correctly identified for the average.

5. 5. A firm's marginal cost is below its average total cost. As output rises, its average total cost will be

   Applied reasoning

   Select one answer

   A At its minimum.

   B Constant.

   C Falling.

   D Rising.
   Show model answer

   Answer: C (Falling.). An average is pulled in the direction of the value being added to it. If the next unit costs less than the current average, it must drag that average down.
   The cricketing analogy is exact: score less than your batting average and the average falls. The three cases follow: MC below AC means AC falling, MC above AC means AC rising, and MC equal to AC means AC is at its minimum.

   Why the other options are wrong

   • A — Average total cost reaches its minimum only where marginal cost has risen to equal it. While MC is still below AC there is further to fall.
   • B — Average total cost would only stay constant if each extra unit cost exactly the average, which again means MC equals AC.
   • D — Rising average cost requires marginal cost to be above it. That happens later, once diminishing returns have pushed MC up through the AC curve.

6. 6. Table 2 shows a firm's total cost at two levels of output.
   Using Table 2, the firm's total fixed cost and its average variable cost at 1,000 units are

   Data interpretation

   Table 2: Total cost at two output levels

   Output (units)	Total cost
   0	£500
   1,000	£2,500

   Select one answer

   A £500 and £2.50.

   B £500 and £2.00.

   C £2,000 and £2.50.

   D £2,500 and £2.00.
   Show model answer

   Answer: B (£500 and £2.00.). Start with the zero-output row, which is the key to the whole table. At zero output there are no variable costs, so the entire £500 must be total fixed cost.
   At 1,000 units, total variable cost = £2,500 − £500 = £2,000.
   Average variable cost = £2,000 ÷ 1,000 = £2.00.

   Why the other options are wrong

   • A — The fixed cost is right, but £2.50 is £2,500 ÷ 1,000 — the average total cost. It includes the fixed costs, which average variable cost must exclude.
   • C — £2,000 is the total variable cost at 1,000 units, not the fixed cost. The fixed cost is what remains when output is zero.
   • D — £2,500 is the total cost of producing 1,000 units, which includes both fixed and variable elements. The average variable cost quoted alongside it is correct.

7. 7. The wage rate a firm pays rises while the productivity of its workers is unchanged. All other things being equal, this will

   Applied reasoning

   Select one answer

   A Have no effect on costs, because wages are a fixed cost.

   B Lower its average total cost at every level of output.

   C Raise its average total cost at every level of output.

   D Raise its total fixed cost but leave average variable cost unchanged.
   Show model answer

   Answer: C (Raise its average total cost at every level of output.). A firm's costs depend on two things: the price of its factors and the productivity of those factors. Here the price of labour has risen with no offsetting gain in output per worker, so every unit now carries a higher labour cost. Average total cost rises at every level of output, which on a diagram shifts the whole cost curve upwards.

   Why the other options are wrong

   • A — Hourly wages vary directly with output, so they are a variable cost. Even where staff are salaried, a pay rise still raises costs — it would raise fixed costs rather than variable ones.
   • B — Costs fall when factor prices fall or productivity rises. This is the opposite case on both counts.
   • D — Wages paid to production workers are part of variable cost, so average variable cost is exactly what rises. Placing the increase in fixed costs misclassifies the item.

8. 8. Which one of the following would reduce a firm's average total cost at every level of output?

   Applied reasoning

   Select one answer

   A A fall in the productivity of its workforce.

   B A rise in the price of the raw materials it uses.

   C A rise in the rent charged on its premises.

   D A rise in output per worker, with wages unchanged.
   Show model answer

   Answer: D (A rise in output per worker, with wages unchanged.). Costs per unit fall when a firm gets more output from the same spending. Higher output per worker with unchanged wage rates does exactly that: the wage bill per unit produced falls, and with it average total cost, at every level of output. This is why productivity growth matters so much to a firm's competitiveness.

   Why the other options are wrong

   • A — Lower productivity means more labour is needed per unit, so costs per unit rise. This is the mirror image of the correct answer.
   • B — Dearer raw materials raise variable costs directly, pushing average total cost up.
   • C — Higher rent raises fixed costs. Average fixed cost rises at every output, and average total cost rises with it.

9. 9. In the long run, a firm's costs are best described as

   Applied reasoning

   Select one answer

   A All fixed, because the scale of production has been set.

   B All variable, because every factor of production can be changed.

   C Partly fixed and partly variable, exactly as in the short run.

   D Unrelated to the quantity of factors the firm employs.
   Show model answer

   Answer: B (All variable, because every factor of production can be changed.). The long run is defined as the period in which every factor of production can be varied — the firm can move premises, buy or sell machinery, and change its whole scale of operation. Since nothing is fixed, no cost is fixed either: all costs are variable in the long run. This is why long-run cost analysis is about economies and diseconomies of scale rather than about spreading fixed costs.

   Why the other options are wrong

   • A — This describes the short run, where the scale of production is what cannot be changed.
   • C — The split between fixed and variable is precisely what distinguishes the short run. In the long run the fixed category is empty.
   • D — Costs are always determined by the quantity and price of the factors employed. What changes between the two periods is which factors can be adjusted.

10. 10. A firm's marginal cost curve cuts its average total cost curve at

    Applied reasoning

    Select one answer

    A The output at which average total cost is at its minimum.

    B The output at which average total cost is at its maximum.

    C The output at which marginal cost is at its minimum.

    D The output at which total cost is at its minimum.
    Show model answer

    Answer: A (The output at which average total cost is at its minimum.). Follow the logic of averages. While marginal cost lies below average total cost it is dragging the average down; once it rises above, it pulls the average up. The average therefore stops falling and starts rising at exactly the point where the two are equal — so marginal cost must cut average total cost at the minimum of the AC curve. The same reasoning applies to average variable cost.

    Why the other options are wrong

    • B — Average total cost has no maximum on a standard U-shaped curve; it rises without limit as diminishing returns bite.
    • C — Marginal cost reaches its own minimum before this point, while it is still below average cost and pulling it down. The crossing happens later, on the rising section of MC.
    • D — Total cost is at its minimum when output is zero, where it equals total fixed cost. That has nothing to do with where the two curves cross.