Chapter 13
Diminishing marginal productivity implies decreasing total product.
False
If the average-total-cost curve is falling, then the marginal-cost curve must also be falling.
False
The average-total-cost curve reflects the shape of both the average-fixed-cost and average-variable-cost curves.
True
always declines as output rises
AFC
Refer to Figure above. Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory?
ATCA
typically rises as output increases
AVC
Total Revenue
Amount a firm receives for the sale of its output
Firms may experience diseconomies of scale when
large management structures are bureaucratic and inefficient.
An example of an explicit cost of production would be the
lease payments for the land on which a firm's factory stands.
When a firm experiences constant returns to scale,
long-run average total cost is unchanged, even when output increases.
Total cost is the
market value of the inputs a firm uses in production.
Rising marginal cost curve
Because of diminishing marginal product
Taylor sells 400 candy bars at $0.50 each. Her total costs are $125. Her profits are
$75.00.
TC / Q
Average total cost
Fixed costs
Costs that do not vary with the quantity of output produced
Variable costs
Costs that vary with the quantity of output produced
Refer to Figure above. Which of the curves is most likely to represent marginal cost?
Curve B
Total costs
Explicit costs + Implicit costs
_______ in the short run
Fixed
Average fixed cost
Fixed cost divided by the quantity of output
Firm's cost of production
Include all the opportunity costs of making its output of goods and services
Marginal product
Increase in output that arises from an additional unit of input
Marginal cost
Increase in total cost arising from an extra unit of production
Implicit costs
Input costs that do not require an outlay of money by the firm
Explicit costs
Input costs that require an outlay of money by the firm
Long-run cost curves
Much flatter
Economies of scale
Long-run average total cost falls as the quantity of output increases
Diseconomies of scale
Long-run average total cost rises as the quantity of output increases
Constant returns to scale
Long-run average total cost stays the same as the quantity of output changes
ΔTC / ΔQ
Marginal cost
Typical cost curves
Marginal cost eventually rises with the quantity of output
Slope of the production function
Marginal product
Diminishing marginal product
Marginal product of an input declines as the quantity of the input increases
Total cost
Market value of the inputs a firm uses in production
Refer to Figure above. The firm experiences economies of scale at which output levels?
Output levels less than K
Gets flatter as production rises
Production function
Efficient scale
Quantity of output that minimizes ATC
Total-cost curve
Relationship between quantity produced and total cost
Production function
Relationship between: Quantity of inputs used to make a good and the quantity of output of that good
opportunity cost
The cost of something is what you give up to get it
Assumption
The goal of a firm is to maximize profit
Industrial organization
The study of how firms' decisions about prices and quantities depend on the market conditions they face
P × Q
Total Revenue Formula
Fixed cost + Variable cost
Total cost
Average total cost
Total cost divided by the quantity of output
Economic profit
Total revenue minus total cost
Profit
Total revenue minus total cost
Accounting profit
Total revenue minus total explicit cost
Gets steeper as the amount produced rises
Total-cost curve
Accounting profit is greater than or equal to economic profit.
True
________ in the long run
Variable
Average variable cost
Variable cost divided by the quantity of output
Refer to Figure above. Curve B intersects curve D
at the efficient scale.
Average total cost is very high when a small amount of output is produced because
average fixed cost is high.
When MC < ATC
average total cost is falling
When marginal cost is less than average total cost,
average total cost is falling.
When MC > ATC
average total cost is rising
The marginal-cost curve crosses the
average-total-cost curve at its minimum
Refer to Figure above. The efficient scale of production occurs at which quantity?
c
If long-run average total cost decreases as the quantity of output increases, the firm is experiencing
economies of scale.
Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is
−$39,000.
