Chapter 11
Average Total Cost
Total Cost (TC) divided by ÷Output (Q).
Average total cost
Total cost divided by the quantity of output produced.
Explicit cost
A cost that involves spending money
AFC=
FC/Q
opportunity costs
explicit costs + implicit costs
Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long run, when no inputs are fixed?
the long-run average cost curve
Profit equals
total revenue minus total cost
Implicit cost
A nonmonetary opportunity cost.
average Variable cost = AVC
VC/Q
Average variable cost
Variable cost divided by the quantity of output produced.
Variable Cost (VC)
Wage Rate (w) times ×Quantity of Workers Used (L).
Which of the following is most likely to a variable cost for a business firm?
cost of shipping products
variable costs
costs that change as output changes
economies of scale
the situation when a firm's long-run average costs fall as it increases the quantity of output it produces
What is the difference between total cost and variable cost in the long run?
the total cost of production equals the variable cost of production.
ATC=
TC/Q
total cost
the cost of all the inputs o firm uses in production
short run
the period of time during which at least one of a firm's inputs is fixed
Why do the marginal product of labor and the average product of labor curves have the shapes illustrated in the graph (MPl & APl) ?
A. Whenever the marginal product of labor is less than the average product of labor, it pulls the average product of labor down. B. The marginal product of labor initially increases due to specialization and then decreases due to diminishing returns.
average fixed cost = AFC
FC/Q
Total Cost (TC)
Fixed Cost (FC) + Variable Cost (VC).
Average fixed cost
Fixed cost divided by the quantity of output produced.
Why did this (company report) report include as part of the company's loss the amount it had expected to earn -- but didn't -- on its investment in manufacturing paint?
The report sought to include implicit costs because DuPont could have invested its money elsewhere and earned $500,000.
Constant returns to scale
The situation in which a firm's long-run average costs remain unchanged as it increases output.
Diseconomies of scale
The situation in which a firm's long-run average costs rise as the firm increases output
Economies of scale
The situation when a firm's long-run average costs fall as it increases the quantity of output it produces.
Average product of labor
The total output produced by a firm divided by the quantity of workers.
Technological change
A change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Long-run average cost curve
A curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.
ATC
AFC + AVC
ATC ==
AFC + AVC
ATC==
AVC+AFC
As the level of output increases, what happens to the difference between the value of average total cost and average variable cost?
As the level of output increases, the difference between the value of average total cost and average variable cost decreases because average fixed cost decreases as output increases.
How do specialization and division of labor typically affect the marginal product of labor?
In the initial stages of production, specialization and division of labor lead to an increasing marginal product for workers, allowing workers to concentrate on a few tasks so that they become more skilled at doing them quickly and efficiently.
Your company incurs a cost for fire insurance, which, in the short run, is fixed. What happens to this cost in the long run?
In the long run, the cost of fire insurance becomes a variable cost.
What is minimum efficient scale?
Minimum efficient scale is the level of output at which the long minus run average cost of production no longer decreases with output the long−run average cost of production no longer decreases with output.
what would the likely consequences be for the number of firms drilling for oil in the United States?
Since firms can reach minimum efficient scale at a relatively low output rate, there will continue to be a large number of firms drilling for oil in the United States. This is the correct answer.
average total cost = ATC
TC/Q
Marginal product of labor,
The additional output a firm produces as a result of hiring one more worker.
Marginal cost
The change in a firm's total cost from producing one more unit of a good or service
Opportunity cost
The highest-valued alternative that must be given up to engage in an activity.
Minimum efficient scale
The level of output at which all economies of scale are exhausted.
How can these companies sell the same book for a lower price than the government and still cover their costs?
These companies decrease their average cost of production by increasing production from low levels.
If Avis and Zipcar, before the merger, each were already as efficient as possible as stand alone companies, would a merger provide any additional possible efficiencies for the combined company?
Yes, because economies of scale would increase.
explicit cost
a cost that involves spending money
fixed costs
costs that remain constant as output changes
Fixed cost (FC)
fc does not depend on the level of output. Fixed cost at any level of output is the same as fixed cost at output zero.
We can predict that, as the Chinese automobile industry develops over the next 10 years, there should be
fewer firms in the industry and the remaining firms will likely be larger.
Any cost that remains unchanged as output changes represents a firm's
fixed cost
Total cost equation
fixed cost + Variable cost
average fixed cost
fixed cost divided by the quantity of output produced
The short-run average cost can never be less the long-run average costs because
in the long run, all inputs are adjusted including the ones that are fixed in the short run.
bottom line
refers to the profit earned by a business
fc=
tc - vc
Mulally meant that Chinese firms
that aren't producing at minimum efficient scale will have higher costs than their competitors.
marginal product of labor
the additional output a firm produces as a result hiring one more worker
short-run production function holds constant
the amount of capital.
opportunity cost
the highest-valued alternative that must be given up to engage in an activity
long run
the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant
technology
the processes a firm uses to turn inputs into output of goods and services
Marginal rate of technical substitution (MRTS)
the rate at which a firm is able to substitute one input for another while keeping the level of output constant
Production function represents
the relationship between the inputs used to produce the maximum output possible
constant returns to scale
the situation in which a firm's long-run average costs remain unchanged as it increases output
Average total cost curves
typically U-shaped
Productivity differences are due to
using different quantities of a variable input such as labor with the same amount of a fixed input, such as pizza ovens.
Any cost that changes as output changes represents a firm's
variable cost
average variable cost
variable cost divided by the quantity of output produced
Economies of scale occur
when a firm's long-run average costs decrease with output.
reducing fixed costs results in savings that "fall right to the bottom line" because
profit, the bottom line, is revenue minus fixed costs minus variable costs, so a reduction in fixed costs increases profit
Isocost line
all the combinations of two inputs, such as capital and labor, that have the same total cost
marginal cost curve intersects both the average variable cost
and the average total cost curves at their minimum points.
Economies of scale exist as a firm increases its size in the long run because of all of the following except
as a firm expands its production, its profit margin per unit of output increases
As output increases, the vertical distance between average total cost and average variable cost curves gets _______ and equals _______.
smaller; average fixed cost
total cost of the tax remains constant as output changes
so the contribution of the tax to the marginal cost of production is zero. OK
What is likely to happen in the long run to firms that do not reach minimum efficient scale?
A firm that does not reach its minimum efficient scale will lose money if it remains in business.
For which of the following reason(s) may firms experience economies of scale?
A. Large firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate. B. Firm's production may increase with a smaller proportional increase in at least one input. C. Both managers and workers may become more specialized and hence more productive as output expands.
In what sense is this tax smaller when the amount of business is larger?
As production increases, fixed costs can be allocated over a greater amount of output, decreasing the average cost of the tax.
MC
Change in TC/ change in Q
Variable costs
Costs that change as output changes.
Fixed costs
Costs that remain constant as output changes.
How are efficiencies realized when combining two firms?
Cutting the overlap between the two firms and leveraging fixed costs across greater quantities.
What are diseconomies of scale?
Diseconomies of scale is when a firm's long-run average costs increase with output.
accounting costs.
Explicit costs
What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?
Firms have difficulty coordinating production
What is the difference between the short run and the long run?
In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.
Total cost
The cost of all the inputs a firm uses in production.
What is the law of diminishing returns?
The law of diminishing returns states that adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
Short run
The period of time during which at least one of a firm's inputs is fixed.
Long run
The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.
Law of diminishing returns
The principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
Technology
The processes a firm uses to turn inputs into outputs of goods and services.
Production function
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.
AVC=
VC/Q
technological change
a change in the ability of a firm to produce a given level of output with a given quantity of inputs
Expansion path
a curve that shows a firm's cost-minimizing combination of inputs for every level of output
Isoquant
a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output
long-run average cost curve
a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
implicit cost
a non-monetary opportunity cost
tc =
atc * Q
vc =
avc * q
All of the following cost measures reach their minimum points when they are equal to the value of marginal cost, except one. Which cost measure is the exception?
average fixed cost
Economies of scale happen when the firm's long run average total cost ________ as output increases.
decreases
Which of the following is most likely to be a fixed cost for a farmer?
insurance premiums on property
A rental car company can realize benefits from economies of scale by
leveraging its purchasing power when buying new cars.
marginal cost
the change in a firm's total cost from producing one more unit of a good or service
implicit costs?
the forgone salary and interest
Q
the level of output
Diseconomies of scale
the situation in which a firm's long-run average costs rises as the firm increases output
average product of labor
the total output produced by a firm divided by the quantity of workers
