CH 12

Profit is the

difference between total revenue and total cost.

<blank> costs represent forgone opportunities.

Implicit

When the marginal product lies below the average product curve, the average product curve starts to

decrease

The principle of diminishing marginal product states that the marginal product of an input

decreases as the quantity of the input increases.

Variable costs

depend on the quantity of output produced.

Costs that require a firm to spend money are

explicit costs

Rent on a building, employee salaries, materials, and machines are examples of

explicit costs

Explicit costs include

fixed and variable costs.

Average fixed cost equals

fixed cost divided by quantity of output.

The marginal product of an employee is the

increase in the units of a product that can be produced by hiring an another employee.

When we ask, "What are a firm's wants?", the answer is that it wants to maximize its

profit

Suppose Drink Well produces flavored water in a rented space using their private well, purchased bottles, and hired hourly labor. They buy advertising services from a marketing company for a fee based on sales. Their fixed costs include

rent

Total revenue is the quantity

sold multiplied by the price paid per unit.

A firm's total cost is the

sum of all of its fixed and variable costs.

The long run is

the period in which all inputs can be changed.

The sum of all of its fixed and variable costs is a firm's

total cost

The amount that a firm pays for all of the inputs that go into producing goods and services is the

total cost.

Total revenue minus explicit costs is

Accounting profit

Paola is thinking of opening her own business. For each of the production inputs listed below, indicate whether the input incurs an implicit cost, explicit cost, or no cost.

Rent: Explicit Wages: Explicit Owned equipment: Implicit

Suppose Event Photo Services takes photographs at private events. They process the photos in a permanently rented space and hire hourly labor to arrange shoots and produce the finished photo packages. They buy advertising services from a marketing company for a fee based on sales.Their variable costs include

labor and advertising.

When a firm realizes economies of scale, it can

lower its average cost by producing more output.

A flat portion of an average total cost curve represents the

various different levels of output at which the firm achieves constant returns to scale.

Because economic profit includes both explicit and implicit costs,

accounting profit is larger than economic profit.

When a firm faces constant returns to scale,

an increase in the quantity of output does not change the average total cost.

If a small firm finds that operating on a larger scale causes its average cost to stay the same, the firm is facing

constant returns to scale.

If a small firm finds that operating on a larger scale enables it to lower its average cost, then the firm is facing

economies of scale.

In business, people frequently say, "It's all about the bottom line." What they mean by this is

that making a profit is the central goal of a business.

When a firm could achieve economies of scale by expanding,

the ATC curve decreases as output increases.

Average total cost is rising when

MC > ATC

The pattern of increasing marginal cost is the inevitable flip-side of diminishing marginal product;

as the productivity of each unit of input decreases, it costs more to get another unit of output.

Explicit and implicit costs are

the two components of opportunity cost.

Suppose a firm has a fixed cost of $20,000 and a $5 variable cost for every unit it produces. If it produces 100 units, fixed cost will be equal to $ and variable cost = If it produces 0 units, fixed cost will be equal to $ and variable cost =

$20,000; $500 $20,000; $0

True economic costs are

Opportunity costs

Economic profit is total revenue minus

all explicit and implicit costs.

Average product of labor is the

units of output÷workers.

Suppose Drink Well produces flavored water in a rented space using their private well, purchased bottles, and hired hourly labor. They buy advertising services from a marketing company for a fee based on sales. The owners used $100,000 of their savings to start the company. Implicit costs include

water, and foregone interest on savings.

Gut Bombs sandwich shop pays $5,000 a month in rent space and equipment. It pays each of its 10 workers $2,500 a month and spends $5,000 on food. There are no other production costs. Usually the shop sells 3,500 sandwiches per month for $10 each. The shop could hire another worker and increase the number of sandwiches it makes by 300. Assuming a constant food cost per sandwich of $1.43, their marginal cost per month per sandwich, of making 300 more sandwiches per month, rounded to the nearest penny, is

$9.76. (reason: MC = ($2,500/300) + $1.43)

The relationship between the quantity of output and average total cost is described by which of the following?

Diseconomies of scale Economies of scale Constant returns to scale

The marginal cost is the <blank> cost that will be incurred by producing one additional unit of <blank>

additional; output

Suppose Jump High produces trampolines in a rented space using purchased frames and materials.They also hire labor and buy advertising services from a marketing company for a flat annual fee.Their fixed costs include

advertising and rent.

Suppose Event Photo Services takes photographs at private events with cameras they purchased. They process the photos in a rented space and hire hourly labor to arrange shoots and produce the finished photo packages. They buy advertising services from a marketing company for a flat annual fee.Their fixed costs include

advertising, rent, and cameras.

If a small firm finds that operating on a larger scale causes its average cost to increase, the firm is facing

diseconomies of scale.

Fixed costs are those that

don't depend on the quantity of output produced.

Economists think of the long run as being the period of time

during which a firm can vary all of its inputs and their costs.

The relationship between the quantity of output and average total cost is described by

economies of scale, diseconomies of scale, and constant returns to scale.

When a firm cannot lower its average cost by either increasing or decreasing its scale, it is said to be operating at a(n)

efficient level

Total costs =

fixed costs + variable costs.

The average fixed cost curve trends downward because the

fixed costs remain the same as production increases.

The minimum of the average <blank> cost curve occurs at a higher output level than the minimum of the average variable costs curve because the average <blank> cost is lower than the average <blank> cost and this pulls the average total down

fixed;total

If you use your saved money as your start-up capital, there is an implicit cost because you

give up interest you could have earned on the money in a savings account.

When output is very low, each additional worker has a <blank> marginal product than the last one; but when more workers are added the marginal product starts to <blank>

higher; decrease

Diseconomies of scale are returns that occur when an increase in the quantity of output

increases average total cost.

The marginal cost will eventually increase because the productivity of each unit of

input falls due the principle of diminishing marginal product.

Because initially the first few employees have an increasing marginal product but eventually the principle of diminishing marginal product kicks in, the average variable cost curve

is U-shaped.

The marginal cost curve

is the inverse of the marginal product curve.

Suppose Drink Well produces flavored water in a permanently rented space using their private well, purchased bottles, and hired hourly labor. They buy advertising services from a marketing company for a flat annual fee. Their variable costs include

labor, water, and bottles.

The change in total cost divided by the change in the quantity of output is the

marginal cost.

When a firm realizes diseconomies of scale by expanding,

the ATC curve increases as output increases.

A firm's first few employees tend to have increasing marginal product. At some point, the principle of diminishing marginal product kicks in. As a result,

the average total cost curve is U-shaped.