Chapter 11

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Average Total Cost​

Total Cost​ (TC) divided by ÷Output ​(Q).

Average total cost

Total cost divided by the quantity of output produced.

Explicit cost

A cost that involves spending money

AFC=

FC/Q

opportunity costs

explicit costs + implicit costs

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

Profit equals

total revenue minus total cost

Implicit cost

A nonmonetary opportunity cost.

average Variable cost = AVC

VC/Q

Average variable cost

Variable cost divided by the quantity of output produced.

Variable Cost​ (VC)

Wage Rate​ (w) times ×Quantity of Workers Used​ (L).

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

cost of shipping products

variable costs

costs that change as output changes

economies of scale

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

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

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

ATC=

TC/Q

total cost

the cost of all the inputs o firm uses in production

short run

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

Why do the marginal product of labor and the average product of labor curves have the shapes illustrated in the​ graph (MPl & APl) ?

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

average fixed cost = AFC

FC/Q

Total Cost​ (TC)

Fixed Cost​ (FC) + Variable Cost​ (VC).

Average fixed cost

Fixed cost divided by the quantity of output produced.

Why did this (company report) report include as part of the​ company's loss the amount it had expected to earn​ -- but​ didn't -- on its investment in manufacturing​ paint?

The report sought to include implicit costs because DuPont could have invested its money elsewhere and earned​ $500,000.

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.

Technological change

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

Long-run average cost curve

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.

ATC

AFC + AVC

ATC ==

AFC + AVC

ATC==

AVC+AFC

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.

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.

Your company incurs a cost for fire insurance​, ​which, in the short​ run, is fixed. What happens to this cost in the long​ run?

In the long​ run, the cost of fire insurance becomes a variable cost.

What is minimum efficient​ scale?

Minimum efficient scale is the level of output at which the long minus run average cost of production no longer decreases with output the long−run average cost of production no longer decreases with output.

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. This is the correct answer.

average total cost = ATC

TC/Q

Marginal product of labor,

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

Marginal cost

The change in a firm's total cost from producing one more unit of a good or service

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Minimum efficient scale

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

How can these companies sell the same book for a lower price than the government and still cover their​ costs?

These companies decrease their average cost of production by increasing production from low levels.

If Avis and​ Zipcar, before the​ merger, each were already as efficient as possible as stand alone​ companies, would a merger provide any additional possible efficiencies for the combined​ company?

Yes, because economies of scale would increase.

explicit cost

a cost that involves spending money

fixed costs

costs that remain constant as output changes

Fixed cost​ (FC)

fc does not depend on the level of output. Fixed cost at any level of output is the same as fixed cost at output zero.

We can predict​ that, as the Chinese automobile industry develops over the next 10​ years, there should be

fewer firms in the industry and the remaining firms will likely be larger.

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

fixed cost

Total cost equation

fixed cost + Variable cost

average fixed cost

fixed cost divided by the quantity of output produced

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.

bottom line

refers to the profit earned by a business

fc=

tc - vc

Mulally meant that Chinese firms

that​ aren't producing at minimum efficient scale will have higher costs than their competitors.

marginal product of labor

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

short-run production function holds constant

the amount of capital.

opportunity cost

the highest-valued alternative that must be given up to engage in an activity

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

technology

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

Marginal rate of technical substitution (MRTS)

the rate at which a firm is able to substitute one input for another while keeping the level of output constant

Production function represents

the relationship between the inputs used to produce the maximum output possible

constant returns to scale

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

Average total cost curves

typically​ U-shaped

Productivity differences are due to

using different quantities of a variable input such as labor with the same amount of a fixed​ input, such as pizza ovens.

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

variable cost

average variable cost

variable cost divided by the quantity of output produced

Economies of scale occur

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

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

Isocost line

all the combinations of two inputs, such as capital and labor, that have the same total cost

marginal cost curve intersects both the average variable cost

and the average total cost curves at their minimum points.

Economies of scale exist as a firm increases its size in the long run because of all of the following except

as a firm expands its​ production, its profit margin per unit of output increases

As output​ increases, the vertical distance between average total cost and average variable cost curves gets​ _______ and equals​ _______.

smaller; average fixed cost

total cost of the tax remains constant as output​ changes

so the contribution of the tax to the marginal cost of production is zero. OK

What is likely to happen in the long run to firms that do not reach minimum efficient​ scale?

A firm that does not reach its minimum efficient scale will lose money if it remains in business.

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

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

In what sense is this tax smaller when the amount of business is​ larger?

As production​ increases, fixed costs can be allocated over a greater amount of​ output, decreasing the average cost of the tax.

MC

Change in TC/ change in Q

Variable costs

Costs that change as output changes.

Fixed costs

Costs that remain constant as output changes.

How are efficiencies realized when combining two​ firms?

Cutting the overlap between the two firms and leveraging fixed costs across greater quantities.

What are diseconomies of​ scale?

Diseconomies of scale is when a​ firm's long-run average costs increase with output.

accounting costs.

Explicit costs

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

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.

Total cost

The cost of all the inputs a firm uses in production.

What is the law of diminishing​ returns?

The law of diminishing returns states that 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.

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.

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.

Production function

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

AVC=

VC/Q

technological change

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

Expansion path

a curve that shows a firm's cost-minimizing combination of inputs for every level of output

Isoquant

a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output

long-run average cost curve

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

implicit cost

a non-monetary opportunity cost

tc =

atc * Q

vc =

avc * q

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?

average fixed cost

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

decreases

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

insurance premiums on property

A rental car company can realize benefits from economies of scale by

leveraging its purchasing power when buying new cars.

marginal cost

the change in a firm's total cost from producing one more unit of a good or service

implicit​ costs?

the forgone salary and interest

Q

the level of output

Diseconomies of scale

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

average product of labor

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


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