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3. Business Economics
3.2 Costs, Revenues, and Profits
3.2.1 Costs
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Cards (28)
Variable costs change with the level of
production
Fixed costs must be paid regardless of
output
level.
True
Variable costs increase as production
increases
Total costs are the sum of fixed costs and variable
costs
Average cost is calculated by dividing total cost by the number of
units produced
.
True
Average Variable Cost (AVC) often decreases initially and then increases due to diminishing
returns
What are fixed costs essential for understanding in a business's cost structure?
They do not vary
Give an example of a variable cost that changes with production.
Wages of hourly workers
Variable costs are directly tied to the volume of goods or services produced.
True
What is the formula for total costs?
T
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C
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=
Total Costs =
T
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lC
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=
F
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C
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+
Fixed Costs +
F
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C
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V
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Variable Costs
Va
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iab
l
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C
os
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s
Average fixed cost decreases as output
increases
Average variable cost often decreases initially and then increases due to
diminishing returns
.
True
Match the cost type with its example:
Fixed Costs ↔️ Rent
Variable Costs ↔️ Raw materials
What often happens to average variable cost as output rises?
AVC decreases then increases
What are fixed costs?
Costs that do not vary
Give an example of a fixed cost.
Rent
Match the fixed cost with its example:
Rent ↔️ Monthly payment for business premises
Insurance premiums ↔️ Payments for business insurance policies
Salaries of permanent staff ↔️ Wages paid to full-time employees
What is an example of a variable cost?
Raw materials
If fixed costs are $1,000 and variable costs are $500, what are the total costs?
1
,
500
1,500
1
,
500
What is the formula for Average Fixed Cost (AFC)?
F
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d
C
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N
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\frac{Fixed \; Costs}{Number \; of \; Units}
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Average Fixed Cost (AFC) increases as output increases.
False
Fixed costs are incurred even if the business produces
nothing
What are variable costs?
Costs that change with production
Total costs are the sum of fixed costs and variable
costs
What is the formula for average cost?
A
v
e
r
a
g
e
C
o
s
t
=
Average Cost =
A
v
er
a
g
e
C
os
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=
T
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a
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C
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t
/
N
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Total Cost / Number of Units
T
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t
a
lC
os
t
/
N
u
mb
ero
f
U
ni
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s
What is the formula for average variable cost?
A
V
C
=
AVC =
A
V
C
=
V
a
r
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b
l
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C
o
s
t
s
/
N
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Variable Costs / Number of Units
Va
r
iab
l
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C
os
t
s
/
N
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mb
ero
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s
What are fixed costs?
Costs that do not vary
What happens to average fixed cost as output increases?
AFC decreases