Microeconomics Pearson Chapter 11 Notes

What can we conclude from this?

We can conclude that the marginal cost of output falls and then rises - forming a U shape - because the marginal product of labor rises and then falls

What happens when a firm experiences negative technological change?

A firm can also experience negative technological change For example, if a firm hires less-skilled workers or if a hurricane damages its facilities, the quantity of output it can produce from a given quantity of inputs may decline

What are some typical variable costs?

A typical firm's variable costs include its labor costs, raw material costs, and costs of electricity and other utilities

Assuming that the analysis of T-Mobile and Sprint executives is correct and that the two firms hadn't merged, ____ represents the long-run average cost curve for AT and T or Verizon and ____ represents the long-run average cost curve for T-Mobile or Sprint. After the firms merged, the newly-merged firm ______

ATC2; ATC1; became similar in size to AT&T and its long-run average cost decreased to the level of AT&T's cost

Production function

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

How does a firm experience an implicit cost?

When a firm experiences a nonmonetary opportunity cost, in incurs an implicit cost

How does a firm experience an explicit cost?

When a firm spends money, it incurs an explicit cost

What are some typical fixed costs?

Typical fixed costs include lease payments for factory or retail space, payments for fire insurance, and payments for advertising

What are the costs of fixed inputs and variable inputs?

costs of fixed inputs are fixed costs and the cost of variable inputs are variable cost

variable costs

costs that change as output changes

fixed costs

costs that remain constant as output changes

What does total cost equal?

fixed cost + variable cost

What happens when the marginal product of labor is rising?

the marginal cost of output is falling

What happens when the marginal product of labor is falling?

the marginal cost of output is rising

What happens as long as the additional output from each new worker is rising?

the marginal cost of that output is falling

What happens when the additional output from each new worker is falling?

the marginal cost of that output is rising

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

marginal, average

Firms may experience economies of scale for a number of reasons. What reasons are the most important?

1. As in the case of automobile production, the firm's technology may make it possible to increase production with a smaller proportional increase in at least one input 2. both workers and managers can become more specialized, enabling them to become more productive, as output expands 3. Large firms, like Ford, Walmart, or Apple, may be able to purchase inputs at lower costs than smaller competitors 4. As a firm expands, it may be able to borrow money at a lower interest rate, thereby lowering its costs

Suppose that last semester your semester GPA was 4.00 and your resulting cumulative GPA was 2.68. Next, suppose that this semester, your semester GPA will be 3.50. If so, then your cumulative GPA A. will increase becase your "marginal" GPA will be above your cumulative GPA B. could increase or decrease because your "marginal" GPA will be below your semester GPA last semester but above your cumulative GPA C. will decrease becase your "marginal" GPA will be below your semester GPA last semester D. will increase because your "marginal" GPA will be above your semester GPA last semester E. will increase because your "marginal" GPA will be below your semester GPA last semester

A

The average total cost curve and the marginal cost curve are A. U shaped B. upward sloping C. L shaped D. Horizontal

A

The average total cost curve and the marginal cost curve are related in that A. the MC curve passes through the minimum point of the ATC curve B. the ATC and MC curves both rise and fall together C. the MC curve rises when the ATC curve falls D. the ATC curve passes through the minimum point of the MC curve

A

Which of the following are sometimes called accounting costs? A. explicit costs B. implicit costs C. total variable costs D. economic costs

A

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? A. the long-run average cost curve B. the variable inputs curve C. economies of scale D. the long-run marginal cost curve

A

What happens as long as marginal cost is below average total cost?

As long as marginal cost is below average total cost, average total cost falls.

What happens as output increases?

As output increases, average fixed cost gets smaller and smaller In calculating average fixed cost, we are dividing something that gets larger and larger - output - into something that remains constant - fixed cost

When output increases, what happens between the difference of average total cost and average variable cost?

As output increases, the difference between average total cost and average variable cost decreases the difference between average total cost and average variable cost is average fixed cost, which gets smaller as output increases.

What is the formula for average total cost?

Average total cost equals average fixed costs plus average variable costs

Economies of scale happen when the firm's long run average total cost ____ as output increases A. is zero B. decreases C. increases D. remains constant

B

The law of diminishing returns applies A. either in the short run or the long run B. in the short run C. in the long run D. none of the above

B

Which of the following costs are implicit costs? A. the payments for paper, wages, and electricity B. the forgone salary and interest C. the lease payments D. all of the above

B

What are her implicit costs?

Before opening her own restaurant, Jill earned a salary of $30,000 per year managing a restaurant for someone else. To start her restaurant, Jill quit her job, withdrew $50,000 from her bank account—where she was earning interest of $3,000 per year—and used the funds to equip her restaurant with tables, chairs, a cash register, and other equipment. To open her own business, Jill had to give up the $30,000 salary and the $3,000 in interest. This $33,000 is an implicit cost because it does not represent payments that Jill has to make.

How do we calculate the marginal product of labor?

By determining how much total output increases as each additional worker is hired.

How do we calculate average fixed cost?

By dividing fixed cost by the quantity of output produced

How do we calculate average variable cost?

By dividing variable cost by the quantity of output produced

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. A. the smaller restaurant benefits more from division of labor B. the larger restaurant experiences diminishing returns sooner than the smaller restaurant C. the larger restaurant has higher fixed costs than the smaller restaurant D. the smaller restaurant has no fixed costs E. both a and b

C

All of the following cost measures reach their minimum points when they are equal to the value of marginal cost, except one. Which cost measure is the exception? A. average variable cost B. average total cost C. average fixed cost D. there is no exception; all threee measures above reach their minimum values when they are equal to the value of marginal cost

C

What cost measure is equal to AFC + AVC? A. total variable cost B. total cost C. average total cost D. marginal cost

C

When a positive technological change occurs A. the same output can be produced with fewer inputs B. more output can be produced from the same inputs C. either a or b D. none of the above

C

When the marginal product of labor is greater thean the average product of labor, then the average product of labor must be A. decreasing B. constant C. increasing D. any of the above answers is possible

C

Which costs are affected by the level of output produced? A. fixed costs B. sunk costs C. variable costs D. all costs

C

Assuming again that the analysis of T-mobile and Sprint executives is correct, what is likely to happen to the firms once the infrastructure for 5G wireless technology has been completed? The newly-merged T-Mobile and Sprint firm A. won't be able to charge prices as high as AT&T and Verizon can charge, so it will be driven out of business B. will have higher costs than AT&T or Verizon and will be driven out of business C. will have lower costs than AT&T or Verizon and will drive them out of business D. will have similar costs to AT&T or Verizon and will likely reach minimum efficient scale

D

The ATC and MC curves have their expected shapes because A. the ATC curve is U shaped B. the MC curve is passing through the minimum point of the ATC curve C. as the ATC curve falls, the MC curve lies below it and when the ATC curve rises, the MC curve lies above it D. all of the above are true

D

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the A. budget constraint B. utility curve C. consumption function D. production function

D

When marginal cost is less than average total cost, average total cost must be A. increasing B. negative C. constant D. decreasing

D

What do the average total cost curve for Jill Johnson;s restaurant have?

It has a U shape As we will soon see, the U shape of the average total cost curve is determined by the shape of the curve that shows the relationship between marginal cost and the level of production

Do economies of scale continue indefinitely?

Economies of scale do not continue indefinitely as the firm increases its output The long-run average cost curve in most industries has a flat segment that often stretches over a substantial range of output

Give an example of this.

For example, in the short run, Jill Johnson has a fixed cost of 800 dollars per week because she signed a loan agreement with a bank when she bought her pizza ovens but in the long run, the cost of buying more pizza ovens becomes variable beacuse Jill can choose whether to expand her business by buying more of them

What do managers of successful firms simulataneously consider?

How they can most profitably run their current store, factory, or office and also whether in the long run they would be more profitable if they became larger or smaller

In the short run, Jill doesn't have time to build a larger restaurant, install additional pizza ovens, or redesign the layout of her restaurant, so what can she do?

In the short run, she can increase or decrease the quantity of pizzas she produces only by increasing or decreasing the number of workers she employs

What are we assuming in technology relationships?

Keep in mind that the relatinoships we are discussing are short-run relationships: we are assuming that the time period is too short for the firm to change its technology or the size of its physical plant

What is the Marginal cost formula?

Marginal cost = change in total cost divided by change in quantity

When does marginal cost equal average total cost?

Marginal cost equals average total cost when average total cost is at its lowest point Therefore, the average total cost curve has a U shape because the marginal cost curve has a U shape

in these graphs in the photostream, what do the different pannels show?

Panel A shows that total cost increases as the level of production increases Panel B shows that her average total cost is roughly U shaped: as production increases from low levels, average total cost falls before rising at higher levels of production

What does the distinction between fixed cost and variable cost apply to?

The distiction between fixed cost and variable cost applies to the short run but not to the long run

What is the important point to recognise here?

The important point is that in the long run, all costs are variable; there are no fixed costs in the long run In other words, in the long run, the total cost equals variable cost, and average total cost equals variable cost

What does the marginal cost curve intersect?

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

What is the shape of Marginal cost, average total cost, and average variable cost curves?

The marginal cost, average total cost, and average variable cost curves are all u-shaped

Economies of scale

The situation in which a firm's long-run average cost falls as it increases the quantity of output it produces

Diseconomies of scale

The situation in which a firm's long-run average cost rises as the firm increases output

What is constant returns to scale?

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

Thus, when does marginal cost equal average variable cost or average total cost?

Therefore, when marginal cost equals average variable cost or average total cost, they must be at their minimum points

When Jill hires a second worker, her marginal product of labor is higher than that of the first worker. What does this increase in marginal prodcut result from?

This increase in marginal product results from the division of labor and from specialization By dividing the tasks to be performed - the division of labor - Jill reduces the time workers lose moving from one activity to the next She also allows them to become more specialized at their tasks

What happens when marginal cost is above average variable cost or average total cost?

When marginal cost is above average variable cost or average total cost, it causes them to increase

What happens when marginal cost is below either average variable cost or average total cost?

When marginal cost is below either average variable cost or average total cost, it causes them to decrease.

What happens when a firm experiences positive technological change?

Whenever a firm experiences positive technological change, it is able to produce more output using the same inputs or the same output using fewer inputs for example, a firm's managers may increase production or sales by rearranging the layout of a retail store or the floor of a factory; by creating a training program for workers; or by installing faster or more reliable machinery or equipment.

What are long-run average cost curves?

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

What happens when marginal cost is above average total cost?

average total cost rises

How do we calculate average total cost?

by dividing total cost by quantity

What do firms often refer to this process as?

firms often refer to this process of lowering average fixed cost by selling more output as "spreading the overhead" (where overhead refers to fixed cost)

What can a firm experience in regards to technological change?

it can experience positive or negative technological change

In an economic sense, what does a firm's technology depend on?

many factors such as the skills of its managers, the training of its workers, and the speed and efficiency of its machinery and equipment

As output increases, the vertical distance between average total cost and average variable cost curves gets ___ and equals ____

smaller, average fixed cost

What is the short run of a pizza restaurant vs general motors?

the actual length of calendar time before the short run becomes the long run differs from firm to firm a pizza restaurant may have a short run of jusst a few weeks before it is able to increase its physical plant by adding another pizza oven and some tables and chairs General Motors, in contrast, may have a short run of a year or more before it can increase the capacity of one of its automobile assembly plants by installing new equipment

Marginal product of labor

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

What does the marginal product of labor equal?

the average product of labor at the quantity of workers for which the average product of labor is at its maximum

What is the relationship between the marginal and average products?

the average product of labor is the average of the marginal products of labor

What happens whenever the marginal product of labor is less than the average product of labor?

the average product of labor must be decreasing

What happens whenever the marginal product of labor is greater than the average product of labor?

the average product of labor must be increasing

total cost

the cost of all the inputs a firm uses in production

What do short-run average cost curves represent?

the costs a firm faces when some input, such as the quantity of machines it uses, is fixed

What is economic depreciation?

the difference between what Jill paid for her capital at the beginning of the year and what she would receive if she sold the capital at the end of the year

Minimum efficient scale

the level of output at which all economies of scale are exhausted

Short run

the period of time during which at least one of a firm's inputs is fixed In particular, in the short run, the firm's technology and the size of its physical plant - it's factory, store, or office - are both fixed, while some other inputs, including the number of workers the firm hires, are variable

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

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

Technology

the processes a firm uses to turn inputs into outputs of goods and services

What is the relationship between the marginal product of labor and the average product of labor the same as?

the relationship between the marginal product of labor and the average product of labor is the same as the relationship between the marginal and average values of any variable

Average product of labor

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

If Jill owns a pizza restaurant, what are her explicit costs?

the wages she pays her workers and payments she makes for rent and electricity

What would happen if Jell could sell the capital at the end of the year, which was 50,000 dollars worth of tables, chairs, and other physical capital in the store?

there would be 10,000 dollars in economic depreciation representing another implicit cost

What do firms do when they analyze the relationship between their level of production and their costs?

they separate the time period involved into the short run and the long run.

Average total cost

total cost divided by the quantity of output produced

What happens when the marginal product of labor is increasing?

total output increases at an increasing rate

What happens when the marginal prodcut of labor is decreasing but still positive?

total output increases, but at a decreasing rate

What would happen if jill kept adding more and more workers to the same quantity of pizza ovens?

workers would eventually begin to get in each other's way and the marginal product of labor would become negative when the marginal product is negative, the level of total output declines