# Q1. When the variable cost is reduced (assuming linear total cost and linear revenue functions),...

## Question:

Q1. When the variable cost is reduced (assuming linear total cost and linear revenue functions), the breakeven point decreases. This is an economic advantage because:

a. The revenue per unit will increase

b. The two lines will now cross at zero

c. The total cost line becomes nonlinear

d. The profit will increase for the same revenue per unit

Q2. An analyst conducting an economic analysis used an inflated interest rate of 16% per year in all calculations. If the real interest rate at the time of the calculations was 12% per year, the inflation rate was equal to:

a. 3.57%

b. 5.28%

c. 8.36%

d. 13.29%

## Variable Cost:

Variable cost refers to the cost associated with the production of goods and services that changes with the change in the level of output produced. It is positively related to the level of production. There are many factors that influence the variable cost of production.

1. option d is correct

This statement is correct because a decrease in the variable cost and breakeven cost will increase the per-unit contribution margin. So, the profits of the firm will increase as the selling price of the product will exceed the variable cost of the product. The profits of the firm earned by the sale of a product will increase by the contribution margin ratio.

2. option a is correct

This option is correct because {eq}\pi = {i_n} - {i_r} {/eq} where {eq}\pi {/eq} is the inflation rate, {eq}{i_n} {/eq} is the nominal interest rate, and {eq}{i_r} {/eq} is the real interest rate.

So, {eq}\begin{array}{c} \pi = 16\% - 12\% \\ = 4\% \end{array} {/eq} which is close to 3.57%.