Econ Exam 3

Explicit cost

A cost associated with purchasing something from someone else.

Implicit cost

A cost incurred by employing your own assets.

Stage 2

AP of variable input falls, output is rising, AP of fixed inputs rises,

At any particular output level, which of the following would be the greatest/largest?

Average Total

Total Avoidable Cost (TAC)

Costs that have not yet been committed or costs have been committed but are recoverable. TVC + FCa

TC

Explicit costs + Implicit costs

Assume a single variable input with several fixed inputs. Suppose when a firm utilizes 6 units of the variable input with existing fixed inputs, they end up with an output level of 19 units. When they utilize 7 units of this variable input with the existing fixed inputs, they end up with an output level of 21. When 7 units of the variable input are used, the average productivity of the variable input is 2 units of output.

False

Assume a single variable input with several fixed inputs. Suppose when a firm utilizes 6 units of the variable input with existing fixed inputs, they end up with an output level of 19 units. When they utilize 7 units of this variable input with the existing fixed inputs, they end up with an output level of 21. When 7 units of the variable input are used, the marginal productivity of the variable input is 3 units of output.

False

If a firm in a perfectly competitive market experiences a situation when the market price falls below the minimum AC, it would be best for that firm to shut down immediately.

False

If a firm operates under conditions of perfect competition, the firm's marginal revenue is less than the market price.

False

In production, a period of time not long enough for all inputs to be avoidable is considered to be a long-run period of time.

False

Sunk costs should influence the quantity that a firm produces.

False

Perfect competition

Homogeneous (same) productMany suppliers No pricing power (suppliers are "price takers")

Rule #2

If it is better to produce than it is to temporarily shut down (which it is in this case), produce the output level were the marginal profit is zero (where marginal revenue equals marginal cost).

Monopolistic competition

Many suppliers Differentiated product or serviceLimited pricing power

Is it possible for the average productivity of a variable input to be negative?

No

Monopoly

One supplier Significant pricing power

TR

P*Q

Rule #1

Produce only if producing results in more revenue than avoidable cost

AP fixed input

Q / fixed input employment level

TR<TAC or P< AAC

Q = 0

TR >TAC or P >AAC

Q > 0

Oligopoly

Relatively few suppliers, but more than one. Differentiated or homogeneous product or service Significant pricing power, especially if firms collude

At a particular level of employment, if the marginal productivity of a variable input is greater than the average productivity of that variable input, the average productivity is necessarily

Rising

Stage 1

Stage 1 is the entire range of employment where the average productivity of the variable input is rising.

Which of the following is NOT an avoidable cost?

Sunk Cost

Profit

TR - TC

Average total cost (ATC)

The average cost of each unit of output (or simply per unit cost). TC/Q = AFC+AVC = AAC+ASC

If adding more of the variable input to the fixed inputs results in more output, which of the following is necessarily true?

The average productivity of the fixed inputs is increasing/improving.

We refer to "stage 2" as the stage of production. Which of the following is happening in stage 2?

The average productivity of the variable input is falling, and the average productivity of the fixed input is rising.

Which of the following is an example of an implicit cost?

The forgone investment return due to having money tied up in a business.

Normal Profit

The minimum amount fo money

Average avoidable cost (AAC)

The per-unit-of-output avoidable cost. TAC/Q

Total Cost (TC)

The sum of all costs.

Total Fixed Cost (TFC)

The sum of costs that do not vary with the level of output. SC + FCa

Total Variable Cost (TVC)

The sum of costs that vary with the level of output.

Total Sunk Cost (TSC)

The sum of fixed costs that are irrevocably committed and cannot be recovered.

Total Avoidable Fixed Cost (TFCA)

The sum of fixed costs that do not vary with the level of output but are avoidable if the supplier does not produce.

Total Economic cost

Total explicit cost + Total implicit cost = Total economic cost

Average productivity

Total production (Q) spread equally across all units of an input (x). X/Q

As the marginal productivity of a variable input rises, the marginal cost of output falls.

True

Assume a single variable input with several fixed inputs. Suppose when a firm utilizes 6 units of the variable input with existing fixed inputs, they end up with an output level of 19 units. When they utilize 7 units of this variable input with the existing fixed inputs, they end up with an output level of 21. When 7 units of the variable input are used, the average productivity of the variable input is 3 units of output.

True

Assume a single variable input with several fixed inputs. Suppose when a firm utilizes 6 units of the variable input with existing fixed inputs, they end up with an output level of 19 units. When they utilize 7 units of this variable input with the existing fixed inputs, they end up with an output level of 21. When 7 units of the variable input are used, the marginal productivity of the variable input is 2 units of output.

True

Assuming there is a single variable input, "stage 2" is a range of employment where the average productivity of the variable input is falling, but the average productivity of the fixed input is still rising.

True

For a firm to be able to earn a profit (i.e., economic profit), the market price must be higher than the minimum average cost (AC).

True

If a business increases its output level, average sunk cost decreases.

True

If a business owner is just earning a "normal" profit in her business, her economic profit must be zero.

True

If a firm operates under conditions of perfect competition, it faces a demand that is horizontal (i.e., perfectly price elastic).

True

Marginal cost is the change in total cost divided by the change in output. That's a fact. Marginal cost is also the change in total variable cost divided by the change in output.

True

Which of the following is NOT a fixed cost?

Variable cost

long run

a period of time sufficiently long for all inputs to be avoidable.

Short run

a period of time that isn't long enough for all inputs and associated costs to be avoided. That is, there is at least one sunk input.

Marginal cost (MC)

additional cost that results when an additional unit of output is produced. TC/Q and TVC/Q

Decreasing cost industry

an industry in which industry costs decrease with an increase in output; shown with a downward-sloped supply curve.

Constant cost industry

an industry in which industry costs do not change with greater output; shown with a flat supply curve

Increasing cost industry

an industry in which industry costs increase with greater output; shown with an upward-sloped supply curve.

The law of diminishing marginal returns

as an increasing amount of a variable input is combined with fixed inputs a point is eventually reached where the output response to the variable input decreases.

the marginal cost intersect

average variable cost at its minimum.

evenue potential of a supplier

determined by the demand that supplier faces.

Marginal Productivity (of a variable input)

he additional production associated with an employment of an additional unit of a variable input. There is no such thing as the marginal productivity of a fixed input. total Q / total X

The contribution profit

is revenue in excess of avoidable costs. TR - TAC

profit maximization

loss minimization

elimination principle above

normal profits are eliminated by entry and below-normal profits are eliminated by exit.

Average fixed cost (AFC)

per-unit-of-output fixed cost. TFC/Q

f a positive profit is NOT possible

per-unit-of-output loss is minimized at an output level greater than the output level where total loss is minimized.

If it's possible to earn a positive profit ( > 0 possible)

per-unit-of-output profit (A) is maximized at an output level lower than where total profit is maximized.

Average variable cost (AVC)

per-unit-of-output variable cost. TVC/Q

When the marginal cost is less (greater) than the average variable cost

the average variable cost is falling (rising)

As an increasing amount of a variable input is combined with fixed inputs a point is eventually reached where the output response to the variable input decreases. We call this

the law of diminishing marginal productivity.

Average avoidable fixed cost (AFCA)

the per-unit-of-output avoidable fixed cost. TFCA/Q

Average sunk cost (ASC)

the per-unit-of-output sunk cost TSC/Q

since average variable cost is part of average total cost

the same relationship exists between marginal cost and average total cost

If the marginal cost of output is less than average variable cost of output

then the average variable cost is falling

If marginal cost of output is greater than the average variable cost of output

then the average variable cost is rising.

Economic profit

total revenue minus ALL costs (explicit and implicit).Economic profit is total revenue minus total economic cost.

bookkeeping profit

total revenue minus the explicit costs

Which of the following is $0 when the firm is temporarily shut down and their output is zero?

total variable cost and total avoidable fixed cost

MR = MC

where Q is found