Figure, Eiven below shows cost curves of a firm. Cost 1 Quantty In the figure, l

Question

Figure, Eiven below shows cost curves of a firm. Cost 1 Quantty In the figure, l: Marginal cost curve l: Average total cost curve Il: Average variable cost curve fer to Figure 7.2. At an output level of H, total fixed cost is: SR. b LK. c. BE d area BEMN. c. area OEMH. 24, A 0.5% increase in the price of a particular product causes the quantity demanded of the product to drop to zero. This means that the price elasticity of demand for the product is: a. moderately inelastic. bhighly inelastic. C. unitary elastic. d. perfectly inelastic. e. perfectly elastic.

Explanation / Answer

(23) (d)

At output level of H, from the graph we find ATC = HM = 0E and AVC = HN = 0B, therefore

AFC = ATC - AVC = 0E - 0B = BE

Total fixed cost = AFC x Output = BE x 0H = BE x BN (Since 0H = BN) = Area BEMN

(24) (d)

Price elasticity of demand = % Change in quantity demanded / % Change in price = 0% / 5% = 0%

Therefore demand is perfectly inelastic.

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