Chapter 13: The Costs of Production

explict costs:

require an outlay of money (paying wages to workers)

production function

shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good

accounting profit:

= total revenue - total explicit costs

economic profit:

= total revenue minus total costs (including explicit and implicit costs)

Economics of scale: Constant returns to scale: Diseconomies of scale:

Economics of scale: ATC falls as Q increases Constant returns to scale: ATC stays the same as Q increases Diseconomies of scale: ATC rises as Q increases

how ATC changes as the Scale of Production Changes

Economics of scale: ATC falls as Q increases Constant returns to scale: ATC stays the same as Q increases Diseconomies of scale: ATC rises as Q increases

total cost (TC)=

TC=FC + VC

when MC<ATC when MC>ATC

When MC<ATC, ATC is falling When MC>ATC, ATC is rising the MC curve crosses the ATC curve at the ATC curve's minimum

Kevin quit his $65,000 a year corporate lawyer job to open up his own law practice. In Kevin's first year in business his total revenue equaled $150,000. Kevin's explicit cost during the year totaled $85,000. Using the information from Kevin's first year in business, what is his economic profit? a. $0 b. $20,000 c. $65,000 d. $85,000

a. $0

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answer is D

For a large firm that produces and sells automobiles, which of the following costs would be a variable cost? a. the $20 million payment that the firm pays each year for accounting services b. the cost of the steel that is used in producing automobiles c. the rent that the firm pays for office space in a suburb of St. Louis d. All of the above are correct.

b. the cost of the steel that is used in producing automobiles

Dianne has decided to start her own photography studio. To purchase the necessary equipment, Dianne withdrew $10,000 from her savings account, which was earning 3% interest, and borrowed an additional $5,000 from the bank at an interest rate of 8%. What is Dianne's annual opportunity cost of the financial capital that has been invested in the business? a. $300 b. $400 c. $700 d. $1,650

c. $700

Let L represent the number of workers hired by a firm and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 5, Q = 125) and (L = 6, Q = 162). Then the marginal product of the 6th worker is a. 25 units of output. b. 27 units of output. c. 37 units of output. d. 162 units of output.

c. 37 units of output.

when marginal cost is less than average total cost a. marginal cost must be falling. b. average variable cost must be falling. c. average total cost is falling. d. average total cost is rising.

c. average total cost is falling

Diseconomics of scale are due to

coordination problems in large organizations -management becomes stretched, can't control costs -more common when Q is high

implicit workers:

do not require a cash outlay (the opportunity cost of the owner's time)

Fixed Costs (FC)

do not vary with the quantity of output produced -cost of equipment, loan payments, rent

Marginal Cost:

is the increase in total cost from producing one more unit MC= Delta TC/Delta Q

firms total goal:

is to maximize profit

marginal product

of any input is the increase in output arising from an additional unit of that input, holding all other inputs constant Delta Q(quantity)/Delta L (labor)

total revenue:

the amount a firm receives from the sale of its output

Diminishing marginal product:

the marginal product of an input declines as the quantity of the input increases (other things equal)

total cost:

the market value of the inputs a firm uses in production

Efficient scale:

the quantity that minimizes ATC

profit =

total revenue - total cost

variable costs (VC):

vary with the quantity produced -cost of materials

economics of scale occcur when increasing production allowes greater specialization:

works more efficient when focusing on a narrow task -more common when Q is low