QUIZ 3
At 500 units of output, total cost is $35,000 and total variable cost is $22,000. What does total fixed cost equal at 500 units?
$13,000 - total cost - total variable cost
Consider the following information about a business Diane opened last year: price = $10; quantity sold = 25,000; implicit cost = $55,000; explicit cost = $160,000. What was Diane's economic profit?
$35,000 - Accounting Profit = Total Revenue - Explicit Cost - Economic Profit = Accounting Profit - Implicit Cost
Consider the following information about a business Diane opened last year: price = $10; quantity sold = 25,000; implicit cost = $55,000; explicit cost = $160,000. What was Diane's accounting profit?
$90,000 - Accounting Profit = Total Revenue - Explicit Cost
Economic Profit =
- Accounting Profit - Implicit Costs - Total Revenue - Explicit Costs + Implicit Costs
Oligolopy
- Entry Conditions: high barriers - Number of Firms: few - Product Type: identical or differentiated - Market Power: significant by generally do not compete on price
Monopolistic Competition
- Entry Conditions: low barriers - Number of Firms: many - Product Type: differentiated - Market Power: some power over price by finding niche
Monopoly
- Entry Conditions: very high barriers - Number of Firms: one - Product Type: unique - Market Power: high power over price
Perfect Competition
- Entry Conditions: very low barriers - Number of Firms: Many - Product Type: Identical - Market Power: none, price-taker
In the theory of perfect competition,
- buyers and sellers of the product know everything that there is to know about the product. - the single firm's demand curve is horizontal and the market demand curve is downward sloping.
Explicit Cost
A cost incurred when an actual (monetary) payment is made.
Implicit Cost
A cost that represents the value of resources used in production for which no actual (monetary) payment is made (opportunity cost).
Normal Profit Definition
A firm that earns normal profit is earning revenue equal to its total costs (explicit plus implicit costs). This is the level of profit necessary to keep resources employed in that particular firm.
Long Run
A period of time in which all inputs in the production process can be varied (no inputs are fixed).
Short Run
A period of time in which some (at least one) inputs in the production process are fixed.
Identify two ways to compute average total cost (ATC).
ATC = TC/Q and ATC = AFC + AVC
Variable Input
An input whose quantity can be changed as output changes.
Fixed Input
An input whose quantity cannot be changed as output changes.
Fixed Cost
Costs that do not vary with output; the costs associated with fixed inputs.
Variable Cost
Costs that vary with output; the costs associated with variable inputs.
Which of the following is not an assumption of the theory of perfect competition?
Each firm produces and sells a differentiated product.
Economic Costs =
Explicit Costs + Implicit Costs
For a perfectly competitive firm, profit maximization or loss minimization occurs at the output at which
MR = MC
Does a real-world market have to meet all the assumptions of the theory of perfect competition before it is considered a perfectly competitive market?
No, probably no real-world market meets all the assumptions of the theory of perfect competition. All that is necessary is that a real-world market behave as if it satisfies all the assumptions.
Profit (Marginal Curve) =
Profit = (P-ATC) x Q
Marginal Physical Product
The change in output that results from changing the variable input by one unit, holding all other inputs fixed
Marginal Cost
The change in total cost that results from a change in output: MC = ΔTC/Δ Q.
Accounting Profit Definition
The difference between total revenue and explicit costs.
Economic Profit Definition
The difference between total revenue and total cost, including both explicit and implicit costs.
Minimum Efficient Scale
The lowest output level at which average total costs are minimized.
Economic profit is the difference between total revenue and ________.
The sum of explicit and implicit costs.
Total Cost
The sum of fixed costs and variable costs. TC = TFC + TVC
Which of the following statements is false?
The theory of perfect competition is completely and accurately descriptive of most real-world firms.
Accounting Profit =
Total Revenue - Explicit Costs
Average Total Cost/Unit Cost
Total cost divided by quantity of output: ATC = TC / Q.
Average Fixed Cost
Total fixed cost divided by quantity of output: AFC = TFC / Q.
Average Variable Cost
Total variable cost divided by quantity of output: AVC = TVC / Q.
Five months ago Wilson opened up a health club. Which of the following is an implicit cost related to health club?
Wilson previously worked as an accountant, earning $3,000 a month.
Normal Profit =
Zero Economic Profit
If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm
added more to total revenue than it added to total costs.
The price at which a perfectly competitive firm sells its product is determined by
all sellers and buyers of the product.
Perfectly competitive firms are price takers for all of the following reasons except that
barriers to enforce firms to sell at the market price.
The theory of perfect competition generally assumes that
buyers and sellers act independently of other buyers and sellers.
Marginal Physical Product (MPP) =
change in total output/ change in total input
A "price taker" is a firm that
does not have the ability to control the price of the product it sells.
The market demand curve in a perfectly competitive market is
downward sloping.
Economies of Scale
exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to fall.
Diseconomies of Scale
exist when inputs are increased by some percentage and output increases by a smaller percentage, causing unit costs to rise.
Constant Return to Scale
exist when inputs are increased by some percentage and output increases by an equal percentage, causing unit costs to remain constant.
A cost that is incurred when an actual monetary payment is made is a(n) _________ cost.
explicit
A cost of resources used on production for which no actual monetary payment is made is a(n) ________ cost.
implicit
As the marginal physical product of the variable input ________, the marginal cost _______.
increase; decrease & decrease; increase
Production
is a transformation of resources or inputs into goods and services
The demand curve for a perfectly competitive firm
is perfectly horizontal.
The perfectly competitive firm will seek to produce the output level for which
marginal cost equals marginal revenue.
The change in output that results from changing a variable input by one unit, holding all other inputs fixed, is called the marginal ______ product of the variable input.
physical
Marginal revenue is
the change in total revenue brought about by selling an additional unit of the good.
If MR > MC, then
the firm can increase its profits or minimize its losses by increasing output.
Which of the following curves should one look at to obverse the law of diminishing marginal returns?
the marginal physical product curve
For a perfectly competitive firm,
the marginal revenue curve and the demand curve are the same.
Real-world markets that approximate the four assumptions of the theory of perfect competition include
the soft drink market.
Profit (Total Curve) =
total revenue - total cost