Production and Costs

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Total Revenue

Price x Quantity

Select the true statement in the following statements about the activity of production....

The process of production is the means by which a firm uses inputs to produce outputs.

What would happen if your boss at the bookstore asked you to decrease some of the business' variable costs?

You would find less expensive designer for the store's advertising posters.

long-run average cost curve

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

Marginal cost is equal to average total cost when ________.

average total cost is minimized

A production function describes how firms...

combine capital, labor and other inputs to create products.

A firm's ________ consist of expenditures that must be made before production starts that typically, over the short run, ________, regardless of the level of production.

fixed costs; do not change

Variable Inputs

inputs that can be changed in the short run

Fixed Inputs

inputs that cannot be changed in the short run

If there are constant returns of scale over a wide range of output in a market, that market is likely to include...

many firms of various sizes.

Which of the following is an example of a long-run fixed cost?

none of these are examples; there are no fixed costs in the long run

Consider ADs and More, an advertising agency. Which of the following would be more likely to be a fixed cost...

office rent

Economies of Scale

refers to the situation where, as the quantity of output goes up, the cost per unit goes down

Marginal Cost

the cost of producing one more unit of a good

Marginal Product

the increase in output that arises from an additional unit of input

Entrepreneurship

the process of starting, organizing, managing, and assuming the responsibility for a business

As production increases

total cost will keep increasing.

Average Variable Cost

variable cost divided by the quantity of output

When this firm produces 5 units, the average total and average variable cost respectively are

$80; $60 AVC = VC / Q = $300/5; ATC = TC / Q = $400/5

Implicit costs are ________.

a foregone opportunity to do something else with your resources

Economists refer to long-term production as a time frame when...

all factors in production can be modified.

Salary payments are...

explicit costs- they are payments actually made.

In the long run, firms try to decide which combination of technology, capital, labor and other resources they should use in order to

minimize cost and maximize profit. minimize cost and maximize profit.

A construction company in the United States, in comparison with a small economically disadvantaged country, will most likely use...

more capital resources.

Technology

refers to the process or processes for producing the product

Private Enterprise

system where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

diseconomies of scale

the situation in which a firm's long-run average costs rise as the firm increases output

Pilar's taco trucks sells about 400 various tacos per day for an average price of $5. On average, each tacos cost $3 (includes labor, materials and miscellaneous), Pilar's profit margin is ________.

$2 per taco Price - cost per unit = profit margin.

Suppose that a firm produces 10 units of output. Its average variable cost (AVC) = $25, average fixed cost (AFC) = $5, and marginal cost (MC) = $30. The firm's total cost is ________.

$300 Total cost = ($25 + 5 ) x 10 units

Dixie, a cattle ranch owner, earns $350,000/month in revenue. Her monthly costs include: Administrative cost: $35,000. Feed: $40,000. Equipment and maintenance. $55,000. Labor: $90,000. Transportation: $20,000. Miscellaneous: $35,000. Foregone rent for the land used for cattle grazing: $18,000. The value of her daughter's time that helps on weekends: $4,000. Owner's salary: $15,000. Dixie's accounting and economic profit respectively are...

$60,000 and $38,000. Accounting profit = Revenue - Explicit cost. Economic Profit = Revenue (sales) - Cost (explicit + implicit costs)

Economic Profit

total revenue minus total cost, including both explicit and implicit costs

Accounting Profit

total revenue minus total explicit cost

Leviathan Effect

when a firm gets so large that it operates inefficiently, experiencing diseconomies of scale

As production increases...

average variable cost will decrease and then increase.

Firm

combines inputs of labor, capital, land, and raw or finished component materials to produce outputs

When the Long Run Average Cost (LRAC) curve is horizontal, it implies that there are ________.

constant returns to scale

Sunk Costs

costs that have already been incurred and cannot be recovered

What is illustrated by the upward-sloping portion of a long run average cost curve?

diseconomies of scale (long -run cost curve)

If Jimmy's Dairy, cheese producer, keeps hiring more workers for their production lines, the total production will...

eventually peak then decrease.

The production function describes how...

how much output a firm can produce given their inputs or factors of production.

In the long run as the addition of technology becomes possible, firms can...

increase productivity.

If there are rapid diseconomies of scale in a market, that market is likely to include...

many small firms.

If a firm's average total cost is increasing, then...

marginal cost must be higher than average total cost

Explicit Costs

out-of-pocket costs, that is, payments that are actually made

Capital

physical capital, the machines, equipment, and buildings that one uses to produce the product

Sunk costs ________.

should have no effect on output decisions

Danielle wants to expand her business and use the 10 acre property she owns and rents to a local sheep rancher for $10,000/year, to build a mall for $4 million. Danielle's total economic costs of the expansion plan are...

the $10,000 in foregone rent and the $4 million cost of the mall.

Jimmy's Dairy produces cheddar cheese. Which of the following would be considered capital input for Jimmy's Dairy?

the cheese molds and machines

Production Technologies

alternative methods of combining/comparing inputs to produce output

Implicit Costs

are more subtle, they represent the opportunity cost of using resources already owned by the firm

Factor Payments

are what the firm pays for the use of the factors of production

Jodie bought a used van to start her food truck business for $8,000. She then spent $7,000 to repair and decorate it. Jodie's mom insists that the business only makes $2,500 per week in revenue which does not cover the cost of the truck. Jodie argues that...

the cost of the truck and repairs are sunk costs and her food truck can be profitable.

Diego wants to expand his business to build a warehouse and office building for $2 million. He'll use the 5 acre property he owns and currently rents to a local cattle rancher for $5,000. What are the implicit costs of of this expansion?

the foregone rent from the cattle rancher

Total product refers to...

the quantity of output produced for a given quantity of labor (number of workers).

The Production Function

the relationship between quantity of inputs used to make a good and the quantity of output of that good Q= f [L, K] or Q = f [L]

Long Run

the time period in which all inputs can be varied

Short Run

the time period in which at least one input is fixed

Average cost

the total cost divided by the quantity produced

When the value of the marginal product reaches zero, then that point is also the place where...

the total product curve reaches its maximum point.

Production

•the process (or processes) a firm uses to transform inputs (ex: labor, capital, raw materials) into outputs, [ex} the goods or services the firm wishes to sell.

Which of the following is an example of a short run production scenario?

A large order for steel I-beams requires that Steely Dan, Inc. hire 5 temporary workers to boost his company's production line to complete the order on time. Only variable cost changed.

Short Run Average Cost Curves

Both AC and AVC slope downwards as greater inputs are added to a production process, output will increase faster and so AC falls. Beyond the lowest AC point, firms will experience diminishing returns to a fixed factor, and then AC and AVC starts to rise. Important: DIMINISHING RETURNS TO A FIXED FACTOR

________ occur when the marginal gain in output diminishes as each additional unit of input is added.

Diminishing marginal returns

If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point?

Divide total costs into two categories: fixed costs that can't be changed in the short run and variable costs that can be.

Natural Resources

Raw materials supplied by nature

The Law of Diminishing Marginal Product

The marginal product of an input gets smaller as one uses more of that input, ceteris paribus.

Profit Equation

Total Revenue - Total Cost

________ include all of the costs of production that increase with the quantity produced.

Variable costs

A shoe factory produces 20 units of output. Its average fixed cost (AFC) = $25, average total cost (ATC) = $35, and marginal cost (MC) = $15. The shoe factory's total variable cost is ________.

$200 Total variable cost = Total cost - total fixed cost = ($35 - 25) x 20

An entrepreneur quits a job where she was paid $75,000 to set up her own business. The new firm had sales revenue of $300,000 last year, while spending $150,000 on compensation for employees (excluding the owner), $25,000 on capital, and $25,000 on materials. What was the firm's economic profit?

$25,000

Labor

Human effort directed toward producing goods and services

How do economists distinguish between the long run and the short run?

In the short run, at least one resource is fixed; in the long run, all resources are variable.

What does "constant returns to scale" mean?

It is a scenario where expanding all inputs proportionately does not change the average cost of production.

MaxTV's board of directors is re-assessing their company strategy. They take a look at their production function, which describes how...

MaxTV uses electronic components, LED lights, labor and other inputs to produce televisions

According to the following cost information, marginal cost and average total cost are equal when the firm produces ________.

6 units ATC = $450/6 = $75 MC = $450-375= $75

Ads and More, an advertising agency, recently expanded their offices as their 3 year lease came to an end. Which best describes Ads and More's situation as its new lease was signed?

Ads and More was able to change some of its fixed costs and is now under long term conditions.

The following cost information shows that as production increases...

Average total cost decreases and then increases. Marginal cost eventually increases.

Which of the following statements is true about accounting profit?

Because economic cost includes implicit and explicit costs, accounting profit is higher than economic profit.


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