ECN 212 Exam 2
total revenue minus total cost
profit
Implicit or Explicit: Foregone wages from a different occupation
Implicit
Implicit Examples:
$5,000 of foregone interest on savings, foregone wages from a different occupation
Accounting Profit (AP) =
= Total Revenue - Explicit Costs
Explicit Examples:
A rent payment, $10,000 of interest on a bank loan, flour for baking cookies to sell
Implicit Costs
Do not require a cash outlay (I.e. the opportunity cost of the owners time)
Implicit or Explicit: Flour for baking cookies to sell
Explicit
T/F: The explicit costs of an item include all those things that must be forgone to acquire that item.
Incorrect. The opportunity costs of an item refers to all those things that must be forgone to acquire that item. Opportunity costs include explicit costs and implicit costs.
Marginal Product of labor:
Shows how much the output (change in Q) increases as we hire one additional worker (change in L), holding all other inputs constant
Total Revenue (definition)
The amount a firm receives from the sale of its output
Total Revenue is
The amount of money that a firm receives from the sale of its output
Average Product:
The labor shows how much of the output (Q) is produced per worker (L), holding all other inputs constant (K)
Diminishing Marginal Product
The marginal product of an input declines as the quantity of the input increases (other things equal)]
Economic Profit (EP) =
Total Revenue - (explicit + implicit costs) Economic profit will never exceed accounting profit
T/F: Assuming that implicit costs are positive, accounting profit is greater than economic profit.
True
total revenue minus total explicit costs is the
accounting profit
marginal cost =
change total cost / change ini quantity
total revenue minus total cost, including explicit and implicit costs
economic profit
the input costs that require an outlay of money by the firm are..
explicit costs
Average fixed cost =
fixed cost / quantity of output
the input costs that do not require an outlay of money by the firm are
implicit costs
Shantelle used to manage a coffee shop, earning $30,000 per year. She gave up that job to start a workout facility. In calculating the economic profit of her workout facility, the $30,000 income that she gave up is counted as part of the workout facility's
implicit costs. (foregone in come is an implicit costs. implicit costs are included in economic costs but not accounting costs)
output equals what?
labor + capital =
Which of the following is not an example of an opportunity cost that is also an implicit cost? 1) forgone labor earnings for an entrepreneur 2) forgone interest payments when the money is invested in one's business 3) Lease payments for the building in which the firm operates 4) the value of the business owner's time
lease payments for the building in which the firm operates (Forgone interest payments, value of business owner's time, and forgone labor earnings do not require an outlay of money and therefore are implicit costs. Lease payments require an outlay of money and therefore are an explicit cost.)
Economists normally assume that the goal of the firm is to
maximize profit
Explicit Costs
require an outlay of money (I.e. paying wages to workers)
Production Function:
shows the relationship between the quantity of input (labor) used to product a good and the quantity of output (product) of that good
Mitch opened a new shop that sells golf equipment and private lessons. If Mitch is a typical firm owner, he will make decisions that will result in
the greatest level of profit, even if that means higher costs.
Total Cost
the market value of the inputs a firm uses in production
industrial organization
the study of how firms decisions about prices and quantites depend on the market condition they face
the the market value for the inputs a firm uses in production is the
total cost
average cost =
total cost / quantity
average total cost =
total cost/ quantity of output
The amount a firm receives for the sale of its output is the
total revenue
profit =
total revenue - total cost
