Microeconomics Chapter 11, Chapter 11 Quiz, Microeconomics Chapter 11

Technological Change

A change in the ability of a firm to produce a given level of output with a given quantity of inputs.

Average fixed cost

AFC=TFC/Q

What is the difference between the average cost of production​ (ATC) and marginal cost of production​ (MC)?

ATC=TC/Q​; MC=ΔTC/ΔQ.

What is higher? Accounting Profit or Economic Profit? And why?

Accounting Profit because it ignores implicit costs.

Average cost:

cost/unit

Suppose First City Bank determines that it must lower its average cost of providing banking services in the long run to become profitable. If the bank experiences economies of scale economies of scale​, what could it​ do? With economies of scale economies of scale​, First City Bank

could lower its long−run run average cost by providing more services

Economies of scale happen when the​ firm's long run average total cost​ ________ as output increases.

decreases

As the level of output​ increases, what happens to the difference between the value of average total cost and average variable​ cost? As the level of output​ increases, the difference between the value of average total cost and average variable cost

decreases because average fixed cost decreases as output increases.

Any cost that remains unchanged as output changes represents a​ firm's

fixed cost

Average Fixed Cost (AFC) Equation

fixed cost / Quantity of output produced

TVC is determined

from production function and prices of the variables

What is the production​ function? The production function is the relationship between

he inputs employed by a firm and the maximum output it can produce with those inputs.

If the​ firm's marginal costs are​ $5 at every level of​ output, what shape will the​ firm's average total cost​ have? The​ firm's average total cost curve will be ______

horizontal

The marginal cost curve intersects both the average variable cost and the average total cost curves at their _____ points

minimum

Small business owner Jay Goltz described several decisions he made to reduce the fixed costs of his​ businesses, including replacing halogen lamps with LED lamps. Goltz​ noted, "...I'm guessing that many business owners could save a lot more than pennies on their fixed​ costs, and those savings...fall right to the bottom​ line." a. The cost of electricity used to power the lights used in Mr.​ Goltz' businesses are fixed costs because these costs

must be paid regardless of the volume of output

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.

Economies of scale occur

when a​ firm's long-run average costs decrease with output.

What are diseconomies of​ scale? Diseconomies of scale is

when a​ firm's long-run average costs increase with output.

After playing two football​ games, a professional football​ team's defense had given up an average of 32 points per game. After playing a third football​ game, the​ team's defense had given up an average of 26 points per game. How many points did the​ team's defense give up in the third football​ game?

32(2)=64 26(3)=78 78-64=14

A company that provides​ home-care for the elderly is able to provide monthly services for 3 patients at a total cost of ​$1,500 and monthly services for 4 patients at a cost of ​$2,250. What is the marginal cost of providing monthly services for a 4th ​patient? The marginal cost is ​$

750

Suppose a company mows yards with workers & lawn-mowing equipment. What will the firm's isocost line show?

All combinations of workers & equipment that have the same total cost.

How are implicit costs different from explicit​ costs?

An explicit cost is a cost that involves spending​ money, while an implicit cost is a nonmonetary cost.

Average product

Ap=Tp/Quantity of Variable input

For which of the following​ reason(s) may firms experience economies of​ scale?

Both managers and workers may become more specialized and hence more productive as output expands., Large firms may be able to purchase inputs at lower costs than smaller​ competitors; they can also borrow money at a lower interest rate., ​Firm's production may increase with a smaller proportional increase in at least one input.

What is technology?

The process a firm uses to turn inputs into outputs of goods & services.

MC Equation

Change in total cost / change in quantity

Variable Costs (VC)

Costs that change as a firm's output changes

Fixed Costs (FC)

Costs that remain constant

What is the difference between the short run & the long run?

In the short run: at least one input is fixed. In the long run: the firm is able to vary all its inputs, adopt new technology, & change the size of its physical plant.

What is the distinction between the economic short run and the economic long​ run?

In the short​ run, at least one input is​ fixed, but in the long​ run, the firm can vary all inputs.

What is the difference between the short run and the long​ run?

In the short​ run, at least one of a​ firm's inputs is​ fixed, while in the long​ run, a firm is able to vary all its inputs and adopt new technology.

Production Function

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.

What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or​ factory?

Firms have difficulty coordinating production.

Suppose that Henry Ford had continued to experience increasing returns to​ scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.

Ford could have profitably sold his cars at a lower price than competitors., Ford would have been able to produce his cars at lower​ long-run average cost than competitors.

Long Run Average Cost Curve

It shows the lowest cost at which a firm is to produce a given quantity of output in the long run, when no inputs are fixed.

If Jill expects to produce 900 pizzas per​ week, should she build a smaller restaurant or a larger​ restaurant? Briefly explain.

Jill should build a larger restaurant because average total costs will be lower than for a smaller restaurant.

A student looks at the data in the table to the right and draws this​ conclusion: ​"The marginal product of labor is increasing for the first 3 workers​ hired, and then it declines for the next 3 workers. I guess each of the first 3 workers must have been hard workers. Then Jill must have had to settle for increasingly poor​ workers." Do you agree with the​ student's analysis? Briefly explain.

No. Marginal product initially increases due to specialization and then decreases due to the law of diminishing returns.

Total Cost

The cost of all the inputs a firm uses in production

Marginal Cost (MC)

The increase in total cost from producing one more unit.

A student​ asks, "If the average cost of producing pizzas is lower in the larger restaurant when Jill produces​ 1,100 pizzas per​ week, why​ isn't it also lower when Jill produces 500 per​ week?" Give a brief answer to the​ student's question.

The larger restaurant has higher fixed costs than the smaller restaurant.

Minimum Efficient Scale

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

Consider the production of hotdogs. Given the average total cost of producing hotdogs illustrated in the graph to the​ right, which of the following is true of the marginal cost of producing​ hotdogs?

The marginal cost of producing up to 600 hotdogs is less than the average total​ cost, but the marginal cost of producing more than 600 hotdogs is greater than the average total cost.; The marginal cost of production is exactly equal to the average total cost at 600 hotdogs.

Short Run

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

Constant Returns to Scale

The situation in which a firm's long-run average costs remain unchanged as it increases output

Diseconomies of Scale

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

Economies of Scale

The situation when a firm's long-run average costs fall as it increases the quantity of output it produces.

Average product of labor

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

Is Jill Johnson correct when she says the​ following: ​"I am currently producing​ 20,000 pizzas per month at a total cost of ​$60,000. If I produce​ 20,001 pizzas, my total cost will rise to ​$60,002. ​Therefore, my marginal cost of producing pizzas must be​ increasing."

Though​ Jill's average total cost of production is​ decreasing, her marginal cost of producing pizzas could be increasing or decreasing.

Average Total Cost (ATC) Equation

Total Cost / Quantity of Output Produced

Economic Profit

Total Revenue - Total Costs (Explicit & Implicit)

Accounting Profit

Total Revenue - Total Explicit Costs

Average Product of Labor Equation

Total output produced by a firm / quantity of workers

Which of the following is true of the relationship between the average product of labor and the marginal product of labor

Whenever the marginal product of labor is greater than the average product of​ labor, the average product of labor must be increasing.

Is it possible for average total cost to be decreasing over a range of output where marginal cost is​ increasing? Briefly explain

Yes. If marginal cost is less than average total​ cost, then average total cost will be decreasing.

Variable cost

a cost that depends on the quantity of output produced; the cost of a variable input.

Fixed cost

a cost that does not depend on the quantity of output produced; the cost of a fixed input.

What is negative technological​ change? Negative technological change is when

a firm must use more inputs to produce the same output

An example of technological change is

a firm rearranging the layout of a retail store to increase sales, a firm installing faster or more reliable machinery or equipment a firm hiring less minus skilled workers

Which of the following is an example of positive technological​ change? Positive technological change occurs when

a firm's workers go through a training program

Total productive curve:

a graphical representation of the production function, showing how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input.

Total cost curve

a graphical representation of the total cost, showing how total cost depends on the quantity of output.

Long run average total cost curve:

a graphical representation showing the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.

What are implicit​ costs? An implicit cost is

a nonmonetary opportunity cost.

What is the law of diminishing​ returns? The law of diminishing returns states that Does it apply in the long​ run?

adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline. No

How do specialization and division of labor typically affect the marginal product of​ labor? In the initial stages of​ production, specialization and division of labor lead to an increasing marginal product for​ workers,

allowing workers to concentrate on a few tasks so that they become more skilled at doing them quickly and efficiently.

UPS has reorganized the routes its drivers take to deliver packages to homes. According to an article in the Wall Street Journal​, ​"The company can save​ $50 million a year by reducing by one mile the average aggregated daily travel of its​ drivers." a. This cost saving is

an example of positive technological change.

Fixed Input

an input whose quantity is fixed for a period of time and cannot be varied (for example, land).

variable input

an input whose quantity the firm can vary at any time (for example, labor).

What is the difference in the short run and the long​ run? In the short​ run,

at least one of the​ firm's inputs is​ fixed, while in the long​ run, the firm is able to vary all its​ inputs, adopt new​ technology, and change the size of its physical plant.

Your company incurs a cost for factory rent​, ​which, in the short​ run, is fixed. What happens to this cost in the long​ run? In the long​ run, the cost of factory rent

becomes a variable cost.

Further, positive technological change is defined as

being able to produce more output using the same inputs., being able to produce the same output using fewer inputs.

Suppose a​ firm's average total cost curve is decreasing with output. What can be said of its marginal cost​ curve? The​ firm's marginal cost curve must be

below the average total cost curve.

Economic cost

expect cost + implicit cost

TFC

expenditures and implicit costs on fixed input - would include

For Jill​ Johnson's pizza​ restaurant, explain whether each of the following is a fixed or variable cost. The payment she makes on her fire insurance policy is a ___ cost

fixed

The lease payment she makes to her landlord who owns the building where her store is located is a ____ cost

fixed

The​ $300-per-month payment she makes to her local newspaper for running her weekly advertisements is a ______ cost.

fixed

What is a production​ function? A​ firm's production function is best described as

illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs.

The​ short-run average cost can never be less the​ long-run average costs because

in the long​ run, all inputs are adjusted including the ones that are fixed in the short run.

The law of diminishing returns applies

in the short run.

Explain how the listed events would affect the following at Southwest​ Airlines: i. Marginal cost ii. Average variable cost iii. Average fixed cost iv. Average total cost Southwest signs a new contract with the Transport Workers Union that requires the airline to increase wages for its flight attendants. Marginal cost would _______, average variable cost would_____ , average fixed cost would_____ , and average total cost would

increase; increase; remain unchanged; increase

The federal government starts to levy a​ $20 per passenger carbon emissions tax on all commercial air travel. Marginal cost would __________, average variable cost would _______, average fixed cost would ______, and average total cost would ______.

increase; increase; remain unchanged; increase

When the marginal product of labor is greater than the average product of​ labor, then the average product of labor must be

increasing

Which of the following is most likely to be a fixed cost for a​ farmer?

insurance premiums on property

A firm cuts its workforce and is able to maintain its initial level of output. This ____an example of positive technological change.

is

A training program makes a​ firm's workers more productive. This ___an example of positive technological change.

is

An exercise program makes a​ firm's workers more healthy and productive. This _____ an example of positive technological change.

is

A firm is able to cut each​ worker's wage rate by 10 percent and still produce the same level of output. This ____ an example of positive technological change.

is not

A firm rearranges the layout of its factory and finds that by using its initial set of​ inputs, it can produce exactly as much as before. This ____ an example of positive technological change.

is not

Firms experience economies of scale for several reasons. What is one such​ reason? A firm might experience economies of scale because

large firms may be able to purchase inputs at lower costs than smaller competitors

When the average product of labor is increasing​, the average product of labor is ________ the marginal product of​ labor, and when the average product of labor is decreasing​, the average product of labor is _______ the marginal product of labor.

less than ​, greater than

Increasing returns to scale:

long-run average total cost declines as output increases (also referred to as economies of scale).

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the

production function.

b. Goltz wrote that reducing fixed costs results in savings that​ "fall right to the bottom​ line" because

profit, the bottom​ line, is revenue minus fixed costs minus variable​ costs, so a reduction in fixed costs increases profit.

Suppose Sheri owns a restaurant that serves pizza using three​ inputs: workers, restaurant space​ (and layout), and ovens. If workers are fixed​, restaurant space​ (and layout) is fixed​, and ovens are variable​, then Sheri is producing pizza in the

short run

Marginal product:

the additional quantity of output produced by using one more unit of that input.

Demising returns to an input:

the effect observed when an increase in the quantity of an input, while holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.

If the marginal product of labor is falling​, is the marginal cost of production rising or​ falling? Briefly explain. If the additional output from each new worker is falling​,

the marginal cost of that output is rising because the only additional cost to producing more output is the additional wages paid to hire more workers.

Long Run

the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decease the size of its physical plant. No fixed costs; all variable costs.

In​ economics, the best definition of technology is

the process a firm uses to turn inputs into outputs.

Production function:

the relationship between the quantity of inputs a firm uses and the quantity of output it produces.

What is the difference between total cost and variable cost in the long​ run? In the long​ run,

the total cost of production equals the variable cost of production.

Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long​ run, when no inputs are​ fixed?

the​ long-run average cost curve

VC

total expenditures on viable inputs e.g. raw materials

The payment she makes to buy pizza dough is a _____ cost

variable

The wages she pays her workers is a ____ cost

variable

Any cost that changes as output changes represents a​ firm's

variable cost.

In the short​ run, at least one input is​ fixed, but in the long​ run, the firm can vary all inputs.

variable costs

Explain why the marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum. The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because

when the marginal cost of the last unit produced is below the​ average, it pulls the average​ down, and when the marginal cost is above the​ average, it pulls the average up.

Suppose that last semester your semester GPA was 1.90 and your resulting cumulative GPA was 2.59. ​Next, suppose that this semester your semester GPA will be 2.00. If​ so, then your cumulative GPA

will decrease because your​ "marginal" GPA will be below your cumulative GPA.

Is Jill Johnson correct when she says the​ following: ​"I am currently producing​ 10,000 pizzas per month at a total cost of ​$40,000 If I produce​ 10,001 pizzas, my total cost will rise to ​$40,050. ​Therefore, my marginal cost of producing pizzas must be​ increasing."

​Jill's average total cost of production is​ increasing, so her marginal cost of producing pizzas must be increasing

Suppose that Jill Johnson has to choose between building a smaller restaurant and a larger restaurant. In the graph to the​ right, the relationship between costs and output for the smaller restaurant is represented by the curve ATC1​, and the relationship between costs and output for the larger restaurant is represented by the curve ATC 2. If Jill expects to produce 650 pizzas per​ week, should she build a smaller restaurant or a larger​ restaurant? Briefly explain.

Jill should build a smaller restaurant because average total costs will be lower than for a larger restaurant.

How can marginal cost be recognizing mathematically?

MC = change in TC / change in Q TC - Total Cost Q - Output

How can marginal cost be expressed​ mathematically? Marginal cost​ (MC) can be expressed as For​ example, if the total cost of producing three units of output is ​$2,477 and the total cost of producing four units of output is ​$3,276​, then the marginal cost of the fourth unit is ​$

MC=ΔTC/ΔQ​, where TC is total cost and Q is output.; 799

Is the amount of time that separates the short run from the long run the same for every​ firm?

No

Is it possible for a firm to experience a technological change that would increase the marginal product of labor while leaving the average product of labor​ unchanged? Explain.

No. An increase in the marginal product of labor will increase the average product of labor.

Suppose a firm has no fixed​ costs, so all of its costs are​ variable, even in the short run. If the​ firm's marginal costs are continually increasing​ (that is, marginal cost is increasing from the first unit of output​ produced), will the​ firm's average total cost curve have a U​ shape?

No. The average total cost curve will be continually increasing.

Implicit Cost

Non monetary opportunity cost

Sally looks at her college transcript and says to​ you, ​"How is this​ possible? My grade point average​ (GPA) for this​ semester's courses is higher than my GPA for last​ semester's courses, but my cumulative GPA still went down from last semester to this​ semester." Explain to Sally how this is possible

Sally's GPA for this semester is lower than her cumulative GPA.

In recent​ years, the United States has experienced large increases in oil production. The increases in oil production are due in large part to a new​ technology, hydraulic fracturing​ ("fracking"). Fracking involves injecting a mixture of​ water, sand, and chemicals into rock formations at high pressure to release oil and natural gas. A news story indicates that economies of scale in fracking may be considerably smaller than in conventional oil drilling. If this view is​ correct, what would the likely consequences be for the number of firms drilling for oil in the United​ States?

Since firms can reach minimum efficient scale at a relatively low output​ rate, there will continue to be a large number of firms drilling for oil in the United States.

Total Cost Equation

TFC + TVC

On what two factors does the cost-minimizing combination of inputs depend?

Technology & input prices

Marginal Product of Labor

The additional output a firm produces as a result of hiring one more worker

Marginal product of labor

The additional output a firm produces as a result of hiring one more worker.

Briefly explain whether you agree or disagree with the following​ argument: Adam​ Smith's idea of the gains to firms from the division of labor makes a lot of sense when the good being manufactured is something complex like automobiles or​ computers, but it​ doesn't apply in the manufacturing of less complex goods or in other sectors of the​ economy, such as retail sales.

The argument is incorrect. Gains from division of labor will occur whenever production of a good or provision of a service has multiple tasks.

Why do the marginal product of labor and the average product of labor curves have the shapes illustrated in the​ graph?

The marginal product of labor initially increases due to specialization and then decreases due to diminishing returns. B. Whenever the marginal product of labor is greater than the average product of​ labor, it pulls the average product of labor up.

Refer to the to graph on the right. For a certain output range​ (or quantity of pizzas produced per​ day), marginal cost is greater than average cost. What is this output​ range? When marginal cost is less than average total​ cost, average total cost must be

The output range greater than about 525 pizzas per day; decreasing.

Law of Diminishing Returns

The principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.

What determines pricing decisions?

The relationship between the quantity a firm can produce and its costs.

Average Variable Cost (AVC) Equation

Variable cost / quantity of output produced

The marginal cost of production shows the change in a​ firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost​ curve? ​Graphically, the marginal cost curve is

a U​ shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.

Which of the following is most likely to a variable cost for a business​ firm?

cost of shipping products

Explicit Cost

cost that involves spending money

In his​ autobiography, T. Boone​ Pickens, a​ geologist, entrepreneur, and oil company​ executive, wrote: ​It's unusual to find a large corporation​ that's efficient ... When you get an inside​ look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work Pickens was describing

diseconomies of​ scale, because he is referring to the inefficiency of a large scale business operation.

Decreasing return to scale:

long-run average total cost increases as output increases (also known as diseconomies of scale).

Constant returns to scale

long-run average total cost is constant as output increases.

Southwest decides on an​ across-the-board 10 percent cut in executive salaries. Marginal cost would _______, average variable cost would _______, average fixed cost would ______, and average total cost would___________.

remain unchanged; remain unchanged; decreased; decreased

Southwest decides to cut its television advertising budget. Marginal cost would _____ , average variable cost would ______, average fixed cost would ______, and average total cost would____.

remain unchanged; remain unchanged; increase; increase

b. Suppose that UPS saves​ $50 million per year because of lower gasoline prices. Would that cost saving be due to technological change at the​ firm? Briefly explain. If UPS saved​ $50 million annually due to a decrease in gasoline​ prices, this would be

saving that results from the use of lower priced inputs.

When a positive technological change​ occurs,

the same output can be produced with fewer inputs., more output can be produced from the same inputs.

The law of diminishing returns states

that adding more of a variable​ input, such as​ labor, to the same amount of a fixed​ input, such as​ capital, will eventually cause the marginal product of the variable input to decline. In this​ case, the marginal product of labor begins to decline when the fourth worker is hired.

What does the​ short-run production function hold​ constant? A​ short-run production function holds constant

the amount of capital

The GPA you earn in a particular semester is your​ ________ GPA, and your cumulative GPA for all completed semesters is your​ ________ GPA.

​marginal; average