Chapter 7 Production & Costs

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A company has increasing marginal returns. If the third worker adds 4 units to total production, how much must the fourth worker add to total production to keep marginal returns increasing?

5 or more units Increasing marginal returns occur when a new worker adds more to total output than the previous new worker, so that both average and marginal products are rising.

Economies of scope

savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology example - producing tide and dryer sheets

Types of firms

sole proprietorship, partnership, corporation

Marginal product is:

the change in output that results from a change in labor.

Marginal Costs

the cost of producing one more unit of a good change in total cost divided by change in variable cost

Short run

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

Long run

the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant

What is the formula for revenue

Price x Quantity

explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

economic profit

a firm's total revenue minus its explicit and implicit costs

variable costs

costs that vary with the quantity of output produced

Total cost

fixed costs plus variable costs

Sullivan Landscaping had a profit of $10,000 in 2009. If its total revenue was $200,000, what was its total cost?

$190,000

Steve and Carrie are partners in a business. Steve has accrued $40,000 in debt for the partnership and Carrie has accrued $25,000 in debt for the partnership. If Carrie decides to leave the country permanently, how much of the total debt is Steve liable for?

$65,000 Each partner in a partnership is subject to unlimited liability for company debts.

_____ plants will have the highest short-run average costs at lower levels of output.

larger

Average fixed cost on a graph is displayed how ?

As quantity increases, average fixed cost constantly decreases.

Fixed costs

Costs that do not vary with the quantity of output produced

Which of the following is an implicit cost? wages paid to the part-time employees who work in the maintenance department depreciation of office equipment the insurance premium on the office equipment taxes

Depreciation of office equipment The third worker adds 15 units to total production. When the fourth worker is hired, she adds 8 units to total production. The company has:

The third worker adds 15 units to total production. When the fourth worker is hired, she adds 8 units to total production. The company has:

Diminishing marginal returns occur when an additional worker adds to total output but at a diminishing rate.

Implicit costs

Implicit costs are the opportunity costs of using resources that belong to the firm

Marginal cost on a graph is displayed how ?

It passes through the lowest points on both the average total cost and average variable cost curves.

Ted's Lawn Care has total variable costs of $100,000 when output is 50,000 units. When output is increased to 100,000 units, the total variable costs increase to $175,000. What is Ted's Lawn Care's marginal cost?

Marginal cost is determined by dividing the change in total variable costs by the change in output. The equation is ($175,000 − $100,000)/(100,000 − 50,000), or 75,000/50,000, or $1.50.

Suppose Ted's Lawn Care hired a new employee. If the company saw total output decrease, there were _____ marginal returns

Negative marginal returns occur when adding a worker actually leads to less total output than previous new worker.

A company has increasing marginal returns. Total production is 5 units when the first worker is hired. Total production rises to 12 units when the second worker is hired. What must happen to total production when the third work is hired if the company is to maintain increasing marginal returns?

Total production must be 20 or more units.

Which of the following is a variable cost?

Variable costs, including expenses such as labor and material costs, fluctuate with output.

Average fixed cost

average fixed cost goes down as production goes up you spread out fixed costs over more items

Firm

economic institution that transforms factors of production into goods and services

Firms that produce a number of products often find it cheaper to produce another product whose production processes are interdependent. This is called

economies of scope

economies of scale

factors that cause a producer's average cost per unit to fall as output rises expanding your business , better use of capital , more workers example - IKEA spreads across the globe = tremendous economies of scale

Ted's Lawn Care hired a new employee. If marginal returns are increasing after this person is hired, average product _____ and marginal product _____.

increase,increase

Rate of return

is the return just sufficient to keep investors satisfied; it therefore represents the opportunity cost of capital

The change in output that results from a change in labor is:

marginal product

Average cost

the total cost divided by the quantity produced slide 26

Accounting Profit

total revenue - explicit costs

What is the formula for profit ?

total revenue - total cost

Lonnie Warner is better known to New York City police as "Lonnie Loosie." Mr. Warner buys cigarettes by the carton (smuggled in from states like Virginia, where they cost about $50 a carton) and sells the individual cigarettes (called "loosies") for $0.75 each or two for $1. According to an April 2011 New York Times story (http://www.nytimes.com/2011/04/05/nyregion/05loosie.html), Mr. Warner and his two partners each take home anywhere from $120 to $150 profit a day on sales of about 2,000 cigarettes (about 10 cartons), most of them sold two at a time. Which of the following is considered an explicit cost for Lonnie?

transportation from home to the location where he sells cigarettes

what must a firm determine ?

what the market wants how to produce the good/service


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