All parts carry equal marks. Distinguish between avoidable and unavoidable costs. Explain, using examples of different types of unavoidable cost, why unavoidable costs are irrelevant when assessing an option, and why whether a particular cost item is unavoidable can depend on the type of option being assessed. Explain the behaviour of average total cost, average variable cost and marginal cost when output is varied from a given plant. Why does a plant need to cover the opportunity cost of its physical capital and, in the long-run, the opportunity cost of the financial capital needed to replace it.
All parts carry equal marks.
Increased expenditure on advertising and acquisition of outlets may be used by a firm to reduce the cross-price elasticity of demand between itself and rivals and between potentially different segments within the overall market. These expenditures can be regarded as investment outlays which enhance the future flow of contribution . Discuss, explaining how contribution may be enhanced and how the firm should assess such investment outlays. Use the incremental approach to explain how the price which maximises current profits is determined.