CIA4U Practice Test & Answer Key Unit #2: The Production Run

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1 CIA4U Practice Test & Answer Key Unit #2: The Production Run Note: Expect 15 to 20 multiple-choice questions and 5 to 10 matching questions on the actual test. Practice these styles of questions in the Mastery Learning Lab. Also, you can expect some insurance multiple choice and graphing and analysis / written response questions. Section B: Graphing and Analysis (11 marks) 1. Complete the following table (1/2 mark for each value = 5 marks): Output (Units Produced) Marginal In the blank area below, construct an average cost model and illustrate the basic shapes, and relationships between, the following curves (2 marks for axes + 4 marks for curves = 6 marks): average fixed costs, average variable costs, average total costs, and marginal costs. Notes: Label both axes of the graph. You do not need to assign specific numeric values to either of the axes. Label each curve at the right-hand side with the appropriate acronym (i.e. AFC, AVC, ATC, MC).

2 3. Use the information provided by the following graph to answer the questions below. (1 mark each = 4 marks) i) Which curve denotes the long-run average costs of firms operating in this industry? ii) Which curve is associated with the size of firm that would be able to make 10 units for the lowest average cost? iii) Which curve is associated with the size of firm that would be able to make 20 units for the lowest average cost? iv) What is the lowest average cost at which Firm A can produce its product?

3 Section C: Written Response (4 marks) 1. For each statement below, indicate whether the statement is true, false, or uncertain, and explain why. i) The marginal cost curve will always cross the average fixed cost curve at its lowest point. (2 marks) ii) The average fixed cost curve will always start above the average variable cost curve. (2 marks)

4 ANSWER KEY 1. Complete the following table (1/2 mark for each value = 5 marks): Output (Units Produced) Marginal In the blank area below, construct an average cost model and illustrate the basic shapes, and relationships between, the following curves (2 marks for axes + 4 marks for curves = 6 marks): Notes: average fixed costs, average variable costs, average total costs, and marginal costs. Label both axes of the graph. You do not need to assign specific numeric values to either of the axes. Label each curve at the right-hand side with the appropriate acronym (i.e. AFC, AVC, ATC, MC).

5 3. Use the information provided by the following graph to answer the questions below. (1 mark each = 4 marks) i) Which curve denotes the long-run average costs of firms operating in this industry? Answer: Curve Y ii) Which curve is associated with the size of firm that would be able to make 10 units for the lowest average cost? Answer: Firm A iii) Which curve is associated with the size of firm that would be able to make 20 units for the lowest average cost? Answer: Firm A or B iv) What is the lowest average cost at which Firm A can produce its product? Answer: $10.00

6 Section C: Written Response (8 marks) 1. For each statement below, indicate whether the statement is true, false, or uncertain, and explain why. i) The marginal cost curve will always cross the average fixed cost curve at its lowest point. (2 marks) False. Technically, the Cost curve does not have a lowest point because it just falls lower and lower as output increases. ii) The average fixed cost curve will always start above the average variable cost curve. (2 marks) False. Where the Cost curve starts and where the Cost curve starts both depend on the nature of the business. AFC curve might start higher than the AVC curve in a business with high fixed costs, but it might start lower than the AVC curve in a business with high variable costs. Note: These are just samples of written response questions. The written response questions on the test will be of the same style and format, but they will not be the exact same questions.

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