micro chap 6

You own Drip Painting company, which employs several painters. Your newest employee says "Now that we've bought drop cloths, paint rollers, and other supplies, we should maximize the number of paint jobs we do - that way we'll spread those fixed costs over more production". You reply,

"Hang on, doing more paint jobs also involves hiring more painters - that variable cost is actually much bigger than the fixed cost of equipment."

Identify the following as a fixed or variable cost for Ken & Larry's ice cream company. 1.advertising 2. milk for making ice cream 3. Research & development on new flavors 4.Chocolate and other flavorings 5.Electricity (used to run mixers and machines) 6. Office space

1. fixed 2.variable 3.fixed 4.variable 5.variable 6.fixed

The following table gives output levels for different levels of workers at Ken & Larry's Ice Cream. Compute the Marginal Product for each jump in workers:

25 20 15

Molly spends $30 on a large cooler for her lemonade stand, her only fixed cost. What is her average fixed cost if she sells the following numbers of cups of lemonade?

5 cups: $6.00 10 cups: $3.00 15 cups: $2.00 30 cups: $1.00 60 cups: $0.50 120 cups: $0.25

Which of the following explains the concept of explicit costs?

A firm's monetary payments to those who supply labor services, materials, fuel, and transportation services. A firm's monetary payments made for the use of resources owned by others.

Which of the following are ways that industries and firms can change the amounts of inputs used in the long-run?

An industry can change its overall capacity. A firm can build a larger plant. An industry can make major complex technological production advances.

Which of the following best defines diseconomies of scale?

As a firm expands the size of its plant, in the long-run, its total average costs rise.

Blank 1 of 2 of scale can and may exist when a production operation is small in size and decision making is efficient, while Blank 2 of 2 of scale set in when production operations grow in size and decision making is less efficient.

Blank 1: Economies Blank 2: Diseconomies

While economies of scale may exist for small-scale producers, what often happens to decision making when production increases to a large scale?

Decision making becomes slowed and less efficient.

How do total variable costs move in relation with output?

Directly

Less coordinated decision making by executives and supervisors leads to Blank 1 of 1 of scale.

Diseconomies

______ profit is the total revenue minus explicit and implicit costs.

Economic

What is another term for economies of scale?

Economies of mass production

Gomez runs a small pottery firm. He hires one helper at $16,500 per year, pays annual rent of $6,000 for his shop, and spends $22,500 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $5,000 per year if alternatively invested. He has been offered $19,500 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $5,500 per year. Total annual revenue from pottery sales is $89,000. a. Calculate the accounting profit for Gomez's pottery firm. b. Now calculate Gomez's economic profit.

Explicit cost 16,500 + 6,000 + 22,500 =45,000 accounting profit 89k - 45k = 44,000 implicit costs 5k + 19,500 + 5,500= 30k economic profit 44k-30k=14,000

What type of costs in total do not vary with changes in output?

Fixed

Which of the following resources can a firm easily and quickly adjust?

Hourly labor Fuel Raw materials

costs are the firm's opportunity costs of using its self-owned, self-employed resources.

Implicit

How can industries and firms adjust their use of inputs in the long run?

Industries and firms can increase or decrease their overall capacity and plant capacity, respectively.

What is the primary reason for diseconomies of scale?

It is difficult for executives to efficiently control and coordinate a firm's operations as it becomes a large-scale producer.

product is the change in total product divided by the change in labor input.

Marginal

Which of the following are examples of variable costs?

Materials costs Fuel costs Transportation services payments

cost of using a resource is the value or worth the resource would have in its best alternative use.

Opportunity

Which group of costs is the most accurate example of variable cost?

Payments for materials, fuel, power, and transportation services

Which of the following is true of economies of scale?

Reductions in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.

Economies of mass production is another term for economies of

Scale

How is marginal product (MP) defined?

The extra output or added product associated with adding a unit of a variable resource.

______ states that as successive units of a variable resource are added to a fixed resource, beyond some point, the marginal product will decline.

The law of diminishing marginal returns

Economically speaking, what period of time is sufficient for new firms to enter or for existing firms to exit an industry?

The long run.

What does the long-run average total cost curve show?

The lowest average total cost at which any chosen output level can be produced after the firm has had time to make adjustments in plant size.

Which of the following defines constant returns to scale?

The unchanging average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.

What is the definition of opportunity cost?

The value or worth a resource would have in its best alternative use.

What methods can be used to calculate average total cost?

Total cost divided by output (Q) Average fixed cost plus average variable cost T otal fixed cost divided by output (Q) plus total variable cost divided by output (Q)

What is the definition of average fixed cost?

Total fixed cost divided by output

What is the definition of economic profit?

Total revenue minus economic costs (explicit and implicit)

What is the definition of average variable cost?

Total variable cost divided by output (Q)

True or false: Hourly labor, raw materials, and fuel are examples of resources a firm can easily adjust.

True

True or false: Implicit costs are the firm's opportunity costs of using its self-owned, self-employed resources.

True

Total costs, including Blank 1 of 1 costs and marginal costs change with the level of output.

Variable

Which of the following worker productivity factors often leads to diseconomies of scale?

Worker alienation from the employer Increased opportunities to shirk and avoid work Slower coordinated decision making to workers

When a firm chooses to produce the appropriate level of output, it has made:

a decision at the margin

Imagine you have some workers and some handheld computers that you can use to take inventory at a warehouse. There are diminishing returns to taking inventory. If one worker uses one computer, he can inventory 125 items per hour. Two workers sharing a computer can together inventory 175 items per hour. Three workers sharing a computer can together inventory 225 items per hour. And four or more workers sharing a computer can together inventory fewer than 235 items per hour. Computers cost $125 each and you must pay each worker $30 per hour.

a. If you assign one worker per computer, what is the cost of inventorying a single item? (125+30)/125 = 1.24. What if you assign two workers per computer? What is the cost of inventorying a single item? 125+60 / 175 = 1.06 c. What if you assign three? 125 + 90 / 225 = .95 d. How many workers per computer should you assign if you wish to minimize the cost of inventorying a single item? 3

The long run average total cost curve is made up of:

all points of tangency of the short run average total cost curves

Average fixed cost equals total fixed cost divided by the _____.

amount of output

Costs exist because resources

are scarce and have alternative uses

Variable costs are those expenses that

change with the level of output.

As a firm grows, ______ may slow, impairing efficiency and raising average total costs.

decision making

Assuming technology and production techniques are fixed and cannot change, if beyond some point of production, a firm experiences declining units of additional output with each additional unit of labor input, then the firm is experiencing the law of

diminishing marginal returns.

The difficulty executives face in efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer is the primary reason for Blank 1 of 1 of scale.

diseconomies

Average total cost for any output level equals total cost Blank 1 of 1 by output.

divided

The ______ of any resource used to produce a good is the value or worth the resource would have in its best alternative use.

economic cost

costs are the monetary payments a firm makes to those who provide the factors or inputs to production.

explicit

Coca-Cola is an example of a:

firm

Apple is an example of a(n) Blank 1 of 2 operating in the cell phone

firm industry

costs do not change as output changes.

fixed

In time, the growth of a firm's plant size and output may lead to ______ and ______.

higher average total costs; diseconomies of scale

costs are the firm's opportunity costs of using its self-owned, self-employed resources.

implicit

With sufficient time, new firms enter or existing firms exit an industry in the

long run

Economies of scale explain the downward-sloping part of the ______ cost curve.

long-run average total

A firm's decision about what output level to produce at is based on ______ decisions.

marginal

cost equals the change or difference in total cost divided by the change or difference in output.

marginal

The following table gives output for different numbers of workers for Shiny Sleeves, a producer of shirt varnish. Shiny Sleeve's wages are $25 per hour. For each level of workers, calculate Shiny Sleeve's total hourly wage cost. Instructions: Enter Marginal Product and Wage Cost in whole numbers and Marginal Cost rounded to two decimal places. For each jump between levels of workers and output, calculate Shiny Sleeve's Marginal Product and Marginal Cost.

marginal - 4,3,2 wage cost - 0, 500,1000,1500 marginal cost - 6.25, 8.33, 12.50

Each short-run ATC curve point that touches the long-run ATC curve, also known as a planning curve, shows the Blank 1 of 1 unit cost attainable for different output levels when the firm has had time to make all desired changes to its plant size.

minimum

Average variable cost equals total variable cost divided by total ______.

output

Economic costs are defined as

payments that must be made to obtain a resource.

The long-run average total cost curve is derived from the many short-run average total cost curves, each of which represents a different

plant size.

As a firm grows, decision making may slow, impairing efficiency and Blank 1 of 1 (raising/lowering) average total cost.

raising

In production, constant Blank 1 of 1 to scale occur between economies and diseconomies of scale, where long-run average costs do not change as output continues to increase.

returns

Economies of mass production is another term for economies of

scale

The formula for marginal costs (MC) is

the change or difference in total cost divided by the change or difference in output the change or difference in total variable cost divided by the change or difference in output

What is the definition of total cost?

the sum of fixed cost and variable cost at each level of output

cost is the sum of fixed cost and variable cost at each level of output.

total

total costs, including Blank 1 of 1 costs and marginal costs change with the level of output.

variable