Firms: Types, Production and Costs: Economics 0455 (Cambridge O Level / IGCSE)

Solene Dairies processes fresh milk into cheese and yoghurt for supermarkets. It has just merged with Pixelforge Studios, a firm that designs and sells mobile phone games. Before the merger, the two firms had no trading relationship with each other, and Pixelforge Studios does not supply, distribute or compete with any of Solene Dairies' dairy products.

What type of merger has taken place between Solene Dairies and Pixelforge Studios?

Larkspur Crafts is a small workshop that makes wooden phone stands. Each month, the workshop pays a fixed $450 in rent and machine-leasing costs, whatever the number of phone stands it produces. Making each phone stand also uses $1.50 of wood and varnish.

In one particular month, the workshop makes 300 phone stands.

(a) State the workshop's total fixed cost for the month, and explain why this cost does not change however many phone stands are produced that month. [2]

(b) Calculate the workshop's total variable cost for the month, and hence its total cost of producing 300 phone stands. [2]

(c) Calculate the average cost of producing one phone stand in this month. [2]

Ferrowood Ltd is a furniture manufacturer that has grown rapidly over the last ten years, from a single small workshop into a large factory employing several hundred workers, now organised into separate production, finance, marketing and human-resources departments.

(a) Define economies of scale. [2]

(b) Using Ferrowood's growth, explain one internal economy of scale the firm might now benefit from. [2]

(c) Explain one diseconomy of scale that Ferrowood might experience as a result of its growth. [2]

Silverline Toys is a small workshop that makes wooden toy trains. Last year, it employed 12 workers who together made 2400 toy trains. This year, after investing in a new automated cutting machine, it employed only 8 workers, who together made 2000 toy trains.

Which of the following correctly describes the change between last year and this year?

Brightweave Textiles is a small firm that weaves scarves and sells every scarf it makes at a fixed price of $15. In one particular month, the firm sells 600 scarves. Its fixed costs for the month are $2400, and each scarf costs an additional $6 of materials and direct labour to make (its variable cost per scarf).

(a) Calculate the firm's total revenue for the month, and its average revenue per scarf sold. [2]

(b) Calculate the firm's total cost of making 600 scarves this month. [2]

(c) Calculate the firm's profit for the month. [2]

(d) Explain one reason why Brightweave Textiles might choose not to aim purely for maximum profit this month. [2]

Quillcraft Prints is a small print shop. Its fixed costs (rent and printer-lease payments) are $800 per month, whatever the number of prints it makes. In January, the shop made 100 prints. In February, it made 200 prints, twice as many as in January, while its fixed costs stayed the same at $800.

What was the shop's average fixed cost (AFC) per print in February?

Marlow Bakes is a small bakery that sells artisan bread loaves at a fixed price of $4 each. Its fixed costs (oven lease and shop rent) are $1200 per month, and each loaf costs an additional $2.50 of flour, yeast and other ingredients (its variable cost per loaf). In one particular month, the bakery sells 400 loaves.

(a) Calculate the bakery's total revenue for the month, and its average revenue per loaf sold. [2]

(b) Calculate the bakery's total cost of making 400 loaves this month. [2]

(c) Calculate the bakery's profit or loss for the month, making clear which it is. [2]

(d) Explain one way Marlow Bakes could try to turn this result into a profit next month, without changing the number of loaves it sells. [2]

GreenLeaf Foods is a food manufacturer that has grown into one of the largest producers in its country. Because it now orders flour, sugar and other raw materials in far larger quantities than before, its wholesalers now charge it a lower price per tonne for these ingredients than they charge smaller manufacturers.

Which type of internal economy of scale is GreenLeaf Foods experiencing?

Ashford Motors is a large car-assembly plant in the town of Ashford. Over the last twenty years, many car-component makers have also chosen to set up their factories in Ashford, so the town is now home to a whole cluster of car-related firms, not just Ashford Motors itself. As a result, the local college now runs specialist courses in vehicle-engineering skills, and the local council has upgraded the roads around the town to handle heavy component deliveries.

(a) Define external economies of scale. [2]

(b) Using the Ashford example, explain how the growth of the WHOLE car-making industry in the town, rather than the growth of Ashford Motors alone, has lowered Ashford Motors' average costs. [3]

(c) Explain one way this kind of economy of scale differs from an internal economy of scale, such as a technical economy gained from Ashford Motors installing larger production-line machinery. [3]

Foxglove Ceramics is a small pottery studio that makes handmade mugs. Its fixed costs (kiln lease and studio rent) are $2000 per month, whatever the number of mugs it makes. Each mug uses $3 of clay, glaze and firing costs (its variable cost per mug), and this amount per mug does not change with the number of mugs made.

(a) The studio makes 250 mugs in one month. Calculate its average fixed cost (AFC), average variable cost (AVC) and average cost (AC) per mug. [3]

(b) In a busier month, the studio makes 500 mugs instead. Calculate its average fixed cost (AFC), average variable cost (AVC) and average cost (AC) per mug for this month. [3]

(c) Using your figures from (a) and (b), explain why average cost (AC) is lower when the studio makes 500 mugs than when it makes 250 mugs. [2]