Chapter 7

Definition of average total cost

the average total cost is the the total cost divided by the quantity. Ex. Total cost of pizzas/Number of pizzas

Definition of Technological Change

If a firm improves its ability to turn inputs into outputs

If cost are rising, why would companies build larger facilities?

It would allow for them to spread the large fixed cost of production across a larger quantity of outputs.

What happens to MC, AVC, AFC, ATC when wages increase?

MC will increase AVC will increase AFC will remain unchanged ATC will increase

What happens to MC, AVC, AFC, ATC when a tax is applied per person for carbon emissions?

MC will increase AVC will increase AFC will remain unchanged ATC will increase

What happens to MC, AVC, AFC, ATC when a 10% increaase in salaries?

MC will remain unchanged AVC will remain unchanged AFC will incrase ATC will increase

Equation for Marginal cost

MC= Change in total cost/ Change in quantity

Then the output quantity is zero, is the cost zero?

The cost is not zero because when the quantity is zero, there are still fixed cost. The cost would be equal to the fixed cost.

Economies of scale

The firm's long-run average costs falling as it increases the quantity of output it produces

Minimum efficient scale

The lowest level of output at which all economies of scale are exhausted

If the average total cost of production is increasing, what is happening to the marginal cost of production?

The marginal cost of production must also be increasing

What shape is the marginal cost of production resemble?

The marginal cost of production resembles a U-shape

On a graph, where do you find the minimum effiecent scale on the curve?

The minimum effiecent scale on the curve will be at the lowest point of the curve.

Definition of Production Function

The relationship between the inputs employed and the maximum output of the firm

The marginal product is decreasing, what is happening to the total output?

The total output increases but at a decreasing rate.

The marginal product is increasing, What is happening to the total output?

The total output is increasing at an increasing rate

Definition of average product of labor

The total output produced by a firm divided by the quantity of workers

Equation for average product of labor

Total output/Numbers of workers

Constant returns of scale

When it's long-run average cost remains unchanged as it increases output

What happens to the average product of labor when the marginal Product of Labor is less than it?

When the MPLis less than APL, APL decreases

Is it possible for a technological change to be negative?

Yes, for example a hurricane damaging facilities.

How do firms decide the optimal combination of inputs?

(MPL/MPCaptial)=(Price Labor/Price of Captial)

As the output increases, what happens to the difference between Average cost and average variable cost?

AFC deceases as output increases therefor due to the equation: ATC= AFC+AVC Therefor the differnce between ATC and AVC will decrease because AFC is decreasing as the output increases.

Definition of explicit cost

A cost that involves spending money. Ex. Electricity, pizza dough, wages, lease payment

Definition of Long-Run

A long period of time in which no inputs are fixed.

Definition of implicit cost

A non-monetary opportunity cost Ex. foregone salary, foregone interest, economic depreciation

Definition of Short-Run

A period of time during which at least one of a firm's inputs is fixed

What point location will produce more output dealing with isoquant curves?

A point on a higher isoquant line will produce more outputs.

Diseconomies of scale

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

Equation for AFC

AFC=FC/Q

When MC is below ATC, what is happening to ATC?

ATC is falling (same is true AVC)

When MC is above ATC, what is happening to ATC?

ATC is rising(same is true for AVC)

Equation for Average total cost using fixed and variable cost

ATC= AFC+AVC

Equation for ATC

ATC=TC/Q

Equation for AVC

AVC=VC/Q

Why does the marginal product of labor have an upside down U-shape?

At first MPL increases because when new workers are hired, theres division of labor and it increases output, after a certian amount of workers, the more workers hired do not make us much difference as the first couple did and the firm experinces diminising returns, therefor the curve starts to slope down.

Definition of law of diminishing returns

At some point, adding more of a variable input to the same amount of a fixed input will cause the marginal product of the variable input to decline

Definition of Fixed costs

Cost that remain constant

Defintion of Variable costs

Costs that change as output changes

What point locations will produce the same amount of output dealing with isoquant curves?

Points on the same isoquant curve will produce the same output

If the marginal product of labor is decreasing, is the marginal cost of production rising or failing?

Rising because the only additional cost will be the cost of hiring more workers

Total Cost Equation

TC=FC + VC

What happens to marginal cost of production when marginal product of labor is rising?

The MCP is falling as MPL is increasing

What happens to marginal cost of production when marginal product of labor is falling?

The MCP is rising as MPL is decreasing

Definition of marginal product of labor

The addition output a firm produces as a result of hiring one more working

When the average product of labor is increasing, the average product of labor is _________ than the marginal product of labor

The average product of labe is 'Less Than' the marginal product of labor

When the average product of labor is decressing, the average product of labor is _______ than the marginal product of labor

The average product of labor is "greater than' the marginal product of labor

Equation for marginal product of labor

total output2-total output1