Chapter 9: Production
fixed costs
costs that do not change with the amount of output produced
A firm has the following information available on the short-run average total cost for three different plant sizes. Plant Size | Output | Short-Run ATC Small | 50 units | $400 Medium | 50 units | $220 Large | 50 units | $200 Which of the following points will fall on the firm's long-run average total cost curve?
50 units and $200 Reason: The LRATC curve is calculated by using the plant size with the minimum short-run average total cost for each quantity. When the level of output is 50 units the large plant size has the lowest average total cost. If 50 units is found to be the optimal long-run output, the firm will operate out of a large plant in the long-run.
Total Revenue (TR)
= Price x Quantity = P x Q
___________ are a key tool that is used for determining whether a business is profitable or not and whether it should continue to produce or not in the short run
Average costs
(Average fixed cost + average variable cost) =
Average total cost
A firm incurs________costs when it pays for a factor of production at the same time that it uses it, whereas_______costs are the costs associated with a firm's use of resources that it owns.
Blank 1: explicit Blank 2: implicit
When the marginal product increases, the marginal cost of production
Blank 1: falls, declines, decreases, or lowers
Which of the following is true of economic costs?
Economic costs are defined as the sum of explicit and implicit costs.
increasing marginal returns
a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource
diminishing marginal returns
a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource
Economies of Scale
a condition in which the long-run average total cost of production decreases as production increases
short-run average total cost curve
a curve showing the average total cost for different levels of output when at least on input of production is fixed, typically plant capacity
The vertical distance between the average variable cost and average total cost curves gets smaller as more output is produced because this distance is equal to the:
average fixed cost which declines as output increases.
The vertical distance between the average variable cost and the average total cost curves gets smaller as more output is produced because this distance is equal to the:
average fixed cost which declines as output increases.
The variable cost curve, at each output level, falls:
below the total cost curve by the amount of the fixed cost curve.
One potential reason diseconomies of scale could exist is that a firm: cannot perfectly replicate its production when it expands. can buy inputs less expensively. cannot afford to expand. has exhausted constant returns to scale.
cannot perfectly replicate its production when it expands.
the average value _______ when the marginal call falls below it
decreases
when the marginal product increases the cost of marginal production ______
decreases (declines)
The average fixed cost curve:
decreases for all levels of output.
The marginal cost curve is:
decreasing for low levels of output, then begins increasing. Reason: The marginal cost curve begins by decreasing, but eventually diminishing marginal returns causes the marginal cost to increase for higher levels of output.
positive economic profit
encourages more firms to enter the market to produce goods and services
when production of a good or service increases, the average total cost of producing it will ________
increase
marginal cost
the additional cost associated with 1 more unit of an activity. For production , it is the change in total cost due to the production of 1 more unit of output MC=Change in Total Cost (TC)/Change in Output (Q) MC=Delta TC/Delta Q or MC=Change in Total Variable Cost (TVC)/Change in Output (Q) MC=Delta TVC/Delta Q
marginal product
the additional output produced as a result of utilizing 1 more unit of variable resource (i.e., labor or capital) Change in total product (TP) / change in output
Minimum Efficiency Scale
the lowest level of output at which the long-run average total cost is minimized
minimum efficiency scale
the lowest level of output at which the long-run average total cost is minimized
Being able to calculate total product average product and marginal product is important:
to operate efficiently and maximize profits.
Average Total Cost (ATC)
total cost divided by the amount of output produced; total cost per unit average fixed cost plus average variable cost. ATC= Total Cost (TVC)/Output (Q)
when deciding how much output it should produce to maximize its profits firms need two pieces of information....
1. the extra cost associated with producing an additional unit of output (marginal cost) 2. the extra benefit of producing that unit (marginal revenue)
Which of the following is a source of economies of scale for a firm? A decrease in the price of output An increase in the price of raw materials A decrease in the size of plant An increase in the specialization of labor
An increase in the specialization of labor
What are the appropriate labels for Curves N and M in the nearby graph?
Curve N is total cost and Curve M is total variable cost.
What are the appropriate labels for Curves N and M in the nearby graph?
Curve N is total cost and Curve M is total variable cost. Reason: The total cost curve lies above the total variable cost curve by the amount of the fixed cost. Since Curve N lies above Curve M by the same amount for all levels of output, it is the total cost, while the upward sloping Curve M is the total variable cost. Curve L is fixed at the same cost for all output, it is the fixed cost curve.
Which of the following is a way in which firms can avoid paying fixed costs in the short run?
Firms cannot avoid fixed costs in the short run.
_______ is an important factor in determining the true cost of an economic activity such as the production of goods and services.
Implicit cost
Which of the following is true of the shape of the marginal cost curve? It is vertical. It is always upward sloping. It is U-shaped. It is always downward sloping.
It is U-shaped.
_______ (Opportunity/Marginal) cost is the cost of the next best alternative that is foregone.
Opportunity
A firm is reducing their output from 2,000 units to 1,000 units. This decision results in a reduction in the long run average cost from $300 to $200. What can be said about this firm?
The firm is experiencing diseconomies of scale. Reason: When output is reduced the LRATC falls. This occurs if the firm is experiencing diseconomies of scale.
A firm is planning to increase output in the long run from 100 units to 200 units. The long run average total cost falls from $25 to $20. What can be said about this level of output?
The firm is experiencing economies of scale. Reason: If long run average costs fall as output increases the company is experiencing economies of scale.
economies of scale
a condition in which the long-run average total cost of production decreases as production increases
Diseconomies of Scale
a condition in which the long-run average total cost of production increases as production increases
diseconomies of scale
a condition in which the long-run average total cost of production increases as production increases
Constant Returns to Scale
a condition in which the long-run average total cost of production remains constant as production increases
long-run average total cost curve
a curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable
Total revenue minus the explicit cost of production is _____ profit.
accounting
Zero ____ profit means that the value of economic profit is negative.
accounting
A curve showing the ______ total cost for different levels of output when at least one input of production is fixed, typically plant capacity, is the short-run average cost curve.
average
In addition to total cost, it is useful to calculate ________ cost because it can be compared directly to the price.
average
marginal values drive ...
average values
Variable cost per unit is equal to:
average variable cost.
the plant size they should utilize depends on the amount of output _______ are willing and able to ______
consumers consume
When the marginal product increases, the marginal_____declines
cost
variable costs
costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases
For quantities occurring before the marginal cost curve and average total cost curve intersect, the average total cost curve will be:
decreasing. Reason: For quantities before the intersection point, ATC will decrease. At the intersection of MC and ATC, ATC will be at its minimum. For quantities beyond the intersection ATC will increase.
Explicit costs are also known as_____(direct/opportunity) costs.
direct
Negative ______ profits encourage firms to exit the market.
economic
Zero_____profit means your revenues are covering not only all the monetary payments you have to make but also all of your implicit costs.
economic
Because the cost of a container is proportional to its surface area, by doubling the diameter of a container, a producer can: compensate for poor management overcome diminishing marginal returns. avoid the mathematics of circles. experience economies of scale.
experience economies of scale.
Total revenue minus the total _____ costs of production is accounting profit.
explicit
When marginal cost is less than average cost, average cost:
falls
The shape of the long-run average total cost curve can differ for different types of firms depending on:
how much production it takes to reach the minimum long-run average total cost.
If a company decides to produce zero units of output,:
it still has to pay fixed costs of production.
A curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable is the ________ -run average cost curve.
long
The _____ -run average total cost curve relates to the _____ -run average total cost curves for different plant configurations.
long, short
A profit-maximizing firm should produce a level of output where:
marginal revenue equals marginal cost.
When the ________ cost falls below the cost, the average ________ cost should be decreasing.
marginal, average
the_____costs of using owned resources are implicit costs.
opportunity
The fixed cost curve is: Multiple choice question. downward sloping, while the total variable cost curve is perfectly vertical. perfectly vertical, while the total variable cost curve is downward sloping. upward sloping, while total variable cost curve is perfectly horizontal. perfectly horizontal, while total variable cost curve is upward sloping.
perfectly horizontal, while total variable cost curve is upward sloping.
economies of scale can result from a variety of factors ...
productivity gains from specialized labor lower costs of inputs as firms purchase larger quantities benefit from bulk pricing
Economic profit consists of _____; accounting profit consists of _____.
revenue minus implicit and explicit costs; revenue minus explicit costs
the average value _______ when the marginal value is equal to it
stays unchanged
average product
the average amount of output produced per unit of a resource employed; total product divided by the number of units of a resource employed AP= TP/units of resource
total cost
the sum of fixed and variable costs of production Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC) TC = TFC+TVC
long run
the time period in which all inputs of production can be changed
short run
the time period in which at least one input of production is fixed but other inputs can be unchanged
total product (TP)
the total amount of output produced with a given amount of resources =Total output
Total ______ costs change with output, whereas total ______ costs do not.
variable;fixed
The average product curve is:
increasing before reaching its peak, then decreasing. Reason: The average product curve increases for the first few workers, then begins to decrease after diminishing marginal returns takes effect.
One potential reason diseconomies of scale could exist is that:
inputs are not as productive as the inputs used before.
for an economy to function efficiently, resources need to go where they are ...
most valued and most productive
economic profit (as measure)
total revenue minus economic costs, which include both explicit and implicit costs of production
Economic Profit
= Total Revenue (TR) - Economic Cost
Accounting Profit
= total Revenue -explicit cost
A company currently producing 10 air conditioners each day has daily total costs of $1,500. Producing an additional air conditioner will increases costs by $250 daily. What are the total daily costs for the firm if they produce the
$1,750 Reason: The total cost of the firm will be $1,750 if the firm produces the 11th air conditioner. We calculate this by adding the marginal cost of the 11th unit to the total cost of producing 10 units.
Suppose a snowboard manufacturer increases its output by 1 snowboard per day. As a result, the total cost of producing snowboards each day rises from $100 to $110. The marginal cost of producing an extra snowboard is $
10
Suppose a snowboard manufacturer increases it output by 1 snowboard per day. As a result, the total cost of producing snowboards each day rises from $120 to $145. The marginal cost of producing an extra snowboard is $
25
The average fixed cost always declines with additional output while the average_____and average ______costs decline and then increase.
Blank 1: total Blank 2: variable
A person who has been managing a dry cleaning store for $30,000 per year decides to open her own dry cleaning store. The expenses are $35,000 for salaries (excluding the owner's), $10,000 for supplies, $8,000 for rent, $2,000 for utilities, and $5,000 for interest on a bank loan. The revenues of the store during the first year of operation are $100,000. The total accounting profit is $
Calculate: the accounting profit Accounting profit = TR - explicit costs = 100000 - 60000 = $40000 Economic Profit
A person who has been managing a dry cleaning store for $30,000 per year decides to open his own dry cleaning store. The expenses are $35,000 for salaries (excluding the owner's), $10,000 for supplies, $8,000 for rent, $2,000 for utilities, and $5,000 for interest on a bank loan.
Calculate: the implicit costs Implicit costs = entrepreneur forgone salary = $30000. Explicit costs = salaries + supplies + rent + utilities + interest on the bank loan = 35000 + 10000 + 8000 + 2000 + 5000 = $60000.
_________(Opportunity/Marginal) cost is the cost of the next best alternative that is foregone.
Opportunity
constant returns to scale
a condition in which the long-run average total cost of production remains constant as production increases
Average ____ cost always declines as a firm produces more output.
fixed
The average total cost curve is:
greater than the average variable cost curve for all levels of output. Reason: The average total cost is the sum of the average variable cost and the average fixed cost. The average total cost curve will always be greater than the average variable cost by the amount of average fixed cost.
The true cost of an economic activity such as the production of goods and services must include:
implicit cost
An opportunity cost is associated with any cost whether it is an cost ____or an cost.____
implicit, explicit
Total revenue minus the total _____ and total _____ costs of production is economic profit.
implicit; explicit
the average value _____ when the marginal value rises above it
increases
the marginal cost curve has to _______ at the bottom of both the AVC and ATC curves
intersect
When deciding whether to keep production at the current level of output or produce more, a firm will need to compare the:
marginal cost and marginal benefit. Reason: When deciding the level of production that will maximize profits firms need to know the additional cost of producing the unit, the marginal cost, and the additional benefit of producing the unit, the marginal benefit.
The marginal cost curve shows the relationship between:
marginal cost and output. Reason: The marginal cost curve is graphed as the relationship between marginal cost and output.
When examining the cost curves for a firm, the minimum average variable cost occurs at the output level where:
marginal cost equals average variable cost. Reason: The minimum AVC occurs at the intersection of the MC and AVC curves. If MC is greater than AVC, AVC is increasing. If MC is less than AVC, AVC is decreasing.
Marginal cost is to determine the level of output that a firm should produce in order to maximize profits
maximize profits
zero accounting profit
means that the value of economic profit is negative
the average total variable cost is _________ when the marginal cost is equal to the average total cost of production
minimized
the average variable cost is _________ at the level of output at which the marginal cost is equal to the average cost
minimized
The long-run average total cost curve of a firm is plotted using the firm's:
minimum short-run average cost for each level of output. Reason: The LRATC is a curve depicting the lowest average total cost possible for each level of output.
explicit costs (or asaccounting costs)
monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others
economic costs
the costs associated with he use of resources; the sum of explicit and implicit costs Ec=ec+ic
implicit costs
the opportunity costs of using owned resources; costs for which no monetary payment is explicitly made
average total cost (ATC)
total cost divided by the amount of output produced; total cost per unit ATC= Total Cost (TC)/Output (Q) ATC= Average fixed cost (AFC) + average variable cost (AVC)
average fixed cost (AFC)
total fixed cost divided by the amount of output produced; fixed cost per unit AFC= Total Fixed Cost (TFC)/Output (Q)
accounting profit
total revenue minus the explicit costs of production
average variable cost (AVC)
total variable cost divided by the amount of output produced; variable cost per unit AVC=Total Variable Cost (TVC)/output (Q)
