test 2- production, costs,profit

At the end of the year, after taxes, a manufacturing firm has $230,000 in revenues, $90,000 in production costs, and $140,000 in opportunity costs. How much economic profit did the firm make?

$0 When a manufacturing firm ends its year with an accounting profit equal to its production costs and opportunity costs combined, this is referred to as earning zero economic profits. Economic Profit=Total Revenues−Explicit Cost−Implict Cost If Total Revenues=Explicit Cost+Implict Cost then Economic Profit>0

Miss T's Ice Tea hit the ground running with its new product launch this year. At the end of the year, after taxes, they have $2,390,000 in revenues. They also have paid $800,000 for ingredients and supplies, $235,000 in wages, and $75,000 in rent. How much accounting profit did they make?

$1,280,000 Accounting profit is a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. For Miss T, the company brought in $2,390,000 in revenues but paid out a total of $1,110,000 for supplies, wages, and rent. Therefore the total accounting profit is, Accounting Profit = Revenue - Explicit Costs Accounting Profit=$2,390,000−$1,110,000=$1,280,000 Miss T's has made $1,280,000 in accounting profit.

Ebon opened up a small coffee shop which earned him $175,000 in total revenue the first year. To do this, Ebon had to quit his previous job as a barista where he earned $25,000 per year. Ebon calculated his economic profit to be $10,000, but he wants to know what his explicit costs were. What are Ebon's explicit costs

$140,000 Economic Profit = Total Revenue - Explicit Costs - Implicit Costs Total Revenue = $175,000 Explicit Costs = X This the variable or unknown we want to solve for. Implicit Costs = $25,000. This is the opportunity cost of Ebon starting his own coffee shop. It represents the money Ebon gave up by not continuing to work as a barista. Economic Profit = $10,000 Recall that Accounting Profit = Total Revenue - Explicit Costs and therefore Economic Profit = Account Profit - Implicit Costs $10,000 = Accounting Profit - Implicit Costs = Accounting Profit - $25,000 Accounting Profit = $35,000 Accounting Profit = Total Revenue - Explicit Costs $35,000=$175,000 - Explicit Costs therefore Explicit Costs = $140,000

At the end of the year, after taxes, a law firm has $600,000 in revenues, $80,000 in rent, wages, and supply costs, and $50,000 in opportunity costs. How much economic profit did the firm make?

$470,000 Economic profits differ from accounting profits in that they include any opportunity costs a firm may have incurred. In this case, the production costs and the opportunity costs should be subtracted from revenues, giving the firm an economic profit of $470,000.

Alina has decided to follow her passion opening a dance studio to teach ballet lessons. She will be taking a pay cut to follow her dream. She makes an annual salary of $175,000 as a stock broker, but expects to only earn $80,000 a year teaching dance. To run her business, she will need to lease a space, purchase a dance floor and mirrors, hire a secretary, and and pay for some advertising. The studio lease will cost her $18,000 annually, a dance floor and mirrors cost $11,000, and advertising is $800. She expects to pay a part-time secretary $20,000 a year. What is the total amount for Alina's explicit expenses?

$49,800 To open her studio, Alina will have to rent a studio space, purchase the dance floor and mirrors, hire a secretary, and pay for advertising. All of these costs are explicit costs of opening her own business. Quitting her job and making less money annually is an implicit cost. To get the total amount of explicit costs, add them together. In this case, Explicit Costs=$18,000+$11,000+$800+$20,000 Explicit Costs=$49,800

The following chart represents the cost of producing varying amounts of desserts in an hour: quantity of output(Q) workers (L) wage rate per hour 10=1.25=$7.50 15=2.4=$7.50 20=3.3=$7.50 25=5=$7.50 30=6.7=$7.50 Calculate the cost of producing 30 desserts. Round your answer to the nearest hundredths place.

$50.25 To calculate the cost, use the formula below: Cost=Workers (L)×Wage Rate per hour=6.7×$7.50=$50.25

At the end of the year, after taxes, a manufacturing firm has $150,000 in revenues, $60,000 in production costs, and $30,000 in opportunity costs. How much economic profit did the firm make?

$60,000 Economic profits differ from accounting profits in that they include any opportunity costs a firm may have incurred. In this case, the production costs and the opportunity costs should be subtracted from revenues, giving the firm an economic profit of $60,000.

The following chart represents the cost of producing different amounts of dresses in an hour. Quantity of Output(Q) Workers(L) Wage Rate per hour 1=2.25=$35.00 2=3.00=$35.00 4=4.10=$35.00 5=5.5=$35.00 7=6.75=$35.00 Calculate the cost of producing 1 dress. Round your answer to the nearest hundredths place.

$78.75 To calculate the cost, use the formula below: Cost=Workers (L)×Wage Rate per hour=2.25×$35.00=$78.75

Jake is leaving Shoe Warehouse to open his own shoe boutique. Jake currently earns $40,000 a year at Shoe Warehouse, but he is expecting to earn $170,000 per year once he is established. Jake has rented a storefront for $40,000 per year and will have to spend $11,000 on inventory and furniture to start his business. Calculate Jake's economic profit

$79,000 Total explicit costs=Rent+Inventory=$40,000+$11,000=$51,000 Step 2: Subtract the explicit costs from the revenue to find accounting profit. Accounting profit=Revenues−Explicit costs=$170,000−51,000=$119,000 Step 3: Subtract explicit costs and implicit costs from total revenues. Economic profit=total revenues−explicit costs−implicit costs=$170,000−$51,000−$40,000=$79,000

which of the following is an example of a variable input?

- a part time worker with no contract - office supplies used on a daily basis (The lease on a building and a contract with an employee are two legally binding contracts that cannot be broken until they expire. A part-time worker is not contractually bound and can easily be replaced, and office supplies can be ordered and consumed on a daily basis. Part-time workers and office supplies are variable inputs)

Since by definition capital is fixed in the short run, our production function becomes

-Since by definition capital is fixed in the short run, our production function becomes Q=f[L,K−] or Q=f[L] -This equation simply indicates that since capital is fixed, the amount of output depends only on the amount of labor employed

The leviathan effect

-The leviathan effect can hit firms that become too large to run efficiently, across the entirety of the enterprise. -Firms that shrink their operations are often responding to finding itself in the diseconomies region, thus moving back to a lower average cost at a lower output level.

diseconomies of scale

-increases in cost per unit when output increases -A firm or a factory can grow so large that it becomes very difficult to manage, resulting in unnecessarily high costs as many layers of management try to communicate with workers and with each other, and as failures to communicate lead to disruptions in the flow of work and materials. -Not many overly large factories exist in the real world, because with their very high production costs, they are unable to compete for long against plants with lower average costs of production. -However, in some planned economies, like the economy of the old Soviet Union, plants that were so large as to be grossly inefficient were able to continue operating for a long time because government economic planners protected them from competition and ensured that they would not make losses. -Diseconomies of scale can also be present across an entire firm, not just a large factory.

The production function expressed in the table below represents the amount of trees that can be cut down in a given hour based on the number of lumberjacks working. Calculate the marginal product of the 4th lumberjack. # Lumberjacks-1-2-3-4-5 # Trees4-10-12-13-13

1 tree (Marginal product is the amount of trees cut down by the next lumberjack that you add. The formula for calculating marginal product is MP=ΔTPΔL. To find the change in TP, subtract the amount produced at 3 lumberjacks from the amount produced at 4 lumberjacks. ΔTP=1 To find the change in labor, subtract 4−3=1. MP=11=1)

in a sandwich shop, 3 workers are able to make 45 sandwiches in an hour during the lunch rush. When a 4th worker is added, the team is able to make 57 sandwiches. Calculate the marginal product of adding the 4th worker

12 sandwiches

A group of 10 pineapple pickers can pick 240 pineapples in an hour. When one more pineapple picker is added to the group, they can pick 270 pineapples in an hour. Calculate the marginal product of the 11th pineapple picker.

30 pineapples The formula for calculating marginal product is MP=ΔTPΔL. To find the change in TP, subtract the amount produced at 10 workers from the amount picked at 11 workers. 270−240 Therefore, ΔTP=30 To find the change in labor, subtract 11−10=1. MP=301=30

8 apple pickers at an orchard can pick 240 apples in a given hour. When a 9th apple picker is added to the group, 300 apples can be picked in an hour. Calculate the marginal product of adding the 9th apple picker.

60 apples (Marginal product is the additional number of apples that can be picked by adding another apple picker. The formula for calculating marginal product is MP=ΔTPΔL. To find the change in TP, subtract the amount produced by 8 apple pickers from the amount produced at 9 apple pickers. ΔTP=300−240=60 To find the change in labor, subtract 9−8=1. MP=601=60 The marginal product of adding a ninth apple picker is 60 apples.)

We obtain average variable cost when we divide variable cost by quantity of output.

For example, the variable cost of producing 80 haircuts is $400, so the average variable cost is $400/80, or $5 per haircut. Note that at any level of output, the average variable cost curve will always lie below the curve for average total cost. The reason is that average total cost includes average variable cost and average fixed cost. Thus, for Q = 80 haircuts, the average total cost is $8 per haircut, while the average variable cost is $5 per haircut. However, as output grows, fixed costs become relatively less important (since they do not rise with output), so average variable cost sneaks closer to average cost.

example of fixed input

In the pizza example, the building is a fixed input. Once the entrepreneur signs the lease, he or she is stuck in the building until the lease expires. Fixed inputs define the firm's maximum output capacity. This is analogous to the potential real GDP shown by society's production possibilities curve, i.e. the maximum quantities of outputs a society can produce at a given time with its available resources

economists oft4en use a shorthand for for the production function:

Q=f[L,K] L represents all the variable inputs K represents all the fixed points

Average total cost (sometimes referred to simply as average cost) is total cost divided by the quantity of output

Since the total cost of producing 40 haircuts is $320, the average total cost for producing each of 40 haircuts is $320/40, or $8 per haircut. Average cost curves are typically U-shaped. Average total cost starts off relatively high, because at low levels of output total costs are dominated by the fixed cost. Mathematically, the denominator is so small that average total cost is large. Average total cost then declines, as the fixed costs are spread over an increasing quantity of output. In the average cost calculation, the rise in the numerator of total costs is relatively small compared to the rise in the denominator of quantity produced. However, as output expands still further, the average cost begins to rise. At the right side of the average cost curve, total costs begin rising more rapidly as diminishing returns come into effect.

Consider the following example. Fred currently works for a corporate law firm. He is considering opening his own legal practice, where he expects to earn $200,000 per year once he establishes himself. To run his own firm, he would need an office and a law clerk. He has found the perfect office, which rents for $50,000 per year. He could hire a law clerk for $35,000 per year. If these figures are accurate, would Fred's legal practice be profitable

Step 1. First you have to calculate the costs. You can take what you know about explicit costs and total them: Office Rental: $50,000 Law Clerk's Salary:+$35,000 Total Explicit Costs:=$85,000 Step 2. Subtracting the explicit costs from the revenue gives you the accounting profit. Revenues: $200,000 Explicit Costs:−$85,000 Accounting Profit:=$115,000 However, these calculations consider only the explicit costs. To open his own practice, Fred would have to quit his current job, where he is earning an annual salary of $125,000. This would be an implicit cost of opening his own firm. Step 3. You need to subtract both the explicit and implicit costs to determine the true economic profit: Economic Profit=Total Revenues−Explicit Cost−Implict Cost=$200,000−$85,000−$125,000=−$10,000 per year Fred would be losing $10,000 per year. That does not mean he would not want to open his own business, but it does mean he would be earning $10,000 less than if he worked for the corporate firm. Implicit costs can include other things as well. Maybe Fred values his leisure time, and starting his own firm would require him to put in more hours than at the corporate firm. In this case, the lost leisure would also be an implicit cost that would subtract from economic profits.

__________ explains why adding more workers will eventually decrease or have no effect on output

The Law of Diminishing Marginal Product (a characteristic of production in the short run that says that as workers are added, marginal product will increase at first, but will eventually have no or negative effect.)

long run production

The long run is the period of time during which all factors are variable. (Once the lease expires for the pizza restaurant, the shop owner can move to a larger or smaller place)

example of variable inputs

The pizzaiolo can order more ingredients with a phone call, so ingredients would be variable inputs. The owner could hire a new person to work the counter pretty quickly as well

While in the short run firms are limited to operating on a single average cost curve (corresponding to the level of fixed costs they have chosen), in the long run when all costs are variable, they can choose to operate on any average cost curve.

Thus, the long-run average cost (LRAC) curve is actually based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will show the least expensive average total cost for any level of output

The sum of the fixed plus variable costs is known as _________

Total cost includes all costs used for production, both fixed and variable costs

production function

a mathematical expression or equation that explains the engineering relationship between inputs and outputs. Q=f[N R, L, K, T,E]

accounting profit

cash concept. total revenue minus explicit costs. the difference between dollars brought in and dollars paid out

the cost of producing any output

depends on the amount of labor capital, raw materials, and other inputs required and the price of each input to the entrepreneur

production functions are specific to the product.

different products have different production functions. the amount of labor a farmer uses to produce a bushel of wheat is likely different than that required to produce an automobile. Firms in the same industry may have somewhat different production functions, since each firm may produce a little differently. One pizza restaurant may make its own dough and sauce, while another may buy those pre-made. A sit-down pizza restaurant probably uses more labor (to handle table service) than a purely take-out restaurant

A firm finds that producing 30,000 vases costs $180,000 and producing 40,000 vases costs $280,000. This pattern might be explained by ___________________.

diseconomies of scale {The per unit cost of the firm when producing 30,000 vases is $180,000/30,000=$6, and when producing 40,000 vases is $280,000/40,000=$7. This means that average costs increase with higher levels of production. The firm is experiencing decreasing returns to scale (or diseconomies of scale).}

Economies of scale occur when a firm's long-run average total cost curve is ___________________.

downward sloping (Economies of scale is associated with decreasing average cost of production as output produced increases. Graphically, it would result in a downward sloping long-run average cost curve)

The long-run average cost curve is typically _______________________.

downward-sloping at first but then upward-sloping (The long-run average cost curve is typically U shaped. Initially, the economies of scale are causing the downward slope. At a much higher level of production, the diseconomies of scale make it upward sloping.)

marginal costs

equal to the change in total cost divided by the change in quantity produced-total cost of producing Q units minus total cost of producing Q minus 1 units

the difference is important because

even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit.

Employee wages and office rent are examples of ________ cost

explicit costs Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs. Explicit costs are out-of-pocket costs, which are actual payments.

true or false: profit is found by subtracting operating costs from total revenue

false (each business, regardless of size or complexity, tries to earn a profit) Profit=Total Revenue−Total Cost

A ____ cost is the cost of inputs that do not change in the short run.

fixed (Fixed costs will stay the same, regardless of output. They are the costs of fixed inputs, such as capital)

we can describe inputs as either

fixed or variable

As output increases, a firm experiencing diseconomies of scale will see the long-run average cost (LRAC) curve ___________.

increasing (By definition, diseconomies of scale occur when LRAC increases as the firm expands its output.)

average total costs

is equal to total costs divided by the quantity produced in sold.

law of diminishing marginal product

its characteristic of production is the short run. there could be no effect or a negative effect on output.

implicit costs

more subtle, represent the opportunity cost of using resources that the firm already owns. for small businesses they are resources that the owners contribute. it also includes the depreciation of goods, materials, and equipment that are necessary for a company to operate.

explicit costs

out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

short run production

period of time during which at least some factors of production are fixed (During the period of the pizza restaurant lease, the pizza restaurant is operating in the short run, because it is limited to using the current building—the owner can't choose a larger or smaller building)

The mathematical equation that explains the engineering relationship between inputs and outputs is called the ___________.

production function (The production function is a mathematical equation that explains the engineering relationship between inputs and outputs and answers the question - how much output can the firm produce given different amounts of inputs?)

how much output can the firm produce given different amounts of input?

production function answers this

businesses try to earn a profit regardless of size

profit=total revenue - total cost

a function of demand for the firms products

revenue

Marginal Product (MP)

the additional output of one or more worker. the change in total product divided by the change in labor: MP=ΔTP/ΔL

total revenue

the income the firm generates from selling its products. multiplying the price of the product times to quantity of output sold. total revenue= price * quantity

variable inputs

those that can easily be increased or decreased in a short period of time

fixed inputs

those that can't easily be increased or decreased in a short period of time

economic profit

total revenue minus total cost, including both explicit and implicit costs

total cost

what the firm pays for producing and selling its products. production involves the firm converting inputs and outputs. each input has a cost to the firm. the sum of these costs is total cost