ECON 2020: Chapter 12
diminishing marginal product
a principle stating that the marginal product of an input decreases as the quantity of the input increases
economies of scale
returns that occur when an increase in the quantity of output decreases average total cost
profit
the difference between total revenue and total cost
average fixed cost
• fixed costs divided by the quantity of output • AFC = FC ÷ Q
marginal cost
• the additional cost incurred by a firm when it produces one additional unit of output • MC = ∆TC ÷ ∆Q
accounting profit
total revenue minus explicit costs
The Mega Corporation sells its product for $10 per unit. This month, it sold 20,000 units. The costs of inputs for each unit is $8. (1) Total revenue is (2)Total cost is (3) Profit is
(1) 200000 (2) 160000 (3) 40000
Suppose Winston's annual salary as an accountant is $60,000, and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. To run the business, he outlays $8,000 in cash to cover all the costs involved with running the business and earns revenues of $150,000. What are Winston's economic profits? A. $78,000 B. $142,000 C. $138,000 D. $150,000
A. $78,000
What values below will help you determine the company's total cost? A. Fixed cost B. Marginal revenue C. Quantity D. Price E. Variable cost
A., E.
Suppose Winston's annual salary as an accountant is $60,000, and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. To run the business, he outlays $8,000 in cash to cover all the costs involved with running the business and earns revenues of $150,000. What are Winston's accounting profits? A. $78,000 B. $142,000 C. $138,000 D. $150,000
B. $142,000
If the marginal cost of hiring another worker to produce sandwiches is $4 per sandwich, and sandwiches sell for $5 each, then: A. two more workers should be hired. B. another worker should be hired. C. Cannot answer this without more information. D. another worker should not be hired.
B. another worker should be hired.
Mika's Manicures leases a space in the local mall for $4,500 a month. For this business, tis expense would be considered an: A. implicit cost of $4,500 B. explicit cost of $4,500 C. explicit cost of $0 D. This is neither an implicit or explicit cost; it is a fixed cost of $4,500
B. explicit cost of $4,500
If a firm decreases production, then its: A. variable costs rise. B. fixed costs stay the same. C. total costs increase. D. All of these are true.
B. fixed costs stay the same.
production function
the relationship between quantity of inputs an the resulting quantity of outputs
average total cost
• total cost divided by the quantity of output • ATC = TC ÷ Q
The principle of diminishing marginal product states that the marginal product of an input: A. decreases as the quantity of the input decreases. B. is constant as the quantity of the input increases. C. decreases as the quantity of the input increases. D. increases as the quantity of the input increases.
C. decreases as the quantity of the input increases.
A sandwich shop has six months left on its lease to its storefront and equipment and currently employs three workers who work on an on-call basis, with no contract. Ingredients are bought daily. How long is the long run for the sandwich shop? A. The long and short run are the same in this case B. A year, the typical term for long run, as there is nothing unusual about this business C. None are correct. D. Six months, after which all inputs listed become variable
D. Six months, after which all inputs listed become variable
Dustin is planning to open a catering business. Indicate if each of the following examples represent an explicit cost or an implicit cost that his new catering business might incur. The wages Dustin pays his employees is an _______(1)_________ The interest Dustin could have earned on the savings he used to invest in starting his business is an __________(2)________ The kitchen space he rents to prep meals is an ______(3)________ The monthly ad in a local magazine is an ____________(4)___________ The uncompensated time Dustin spends keeping the books for his new business is an __________(5)___________
(1) Explicit (2) Implicit (3) Explicit (4) Explicit (5) Implicit
Webby Inc. is a web development company. Webby's monthly production function for developing websites is given in the table below. Fill in the marginal product column. *Programmers..........Websites..........Marginal Product* ...............0...............................0.............................-.................. ...............1................................2.............................?.................. ...............2...............................6.............................?.................. ...............3...............................14...........................?.................. ...............4..............................20...........................?.................. ...............5..............................24...........................?.................. ...............6...............................26...........................?..................
*Marginal Product* ..................-..................... ..................2..................... ..................4..................... ..................8..................... ...................6.................... ...................4.................... ...................2....................
Labor (# of employees) Total Output 0...............................................................0 1................................................................10 2...............................................................50 3...............................................................110 4...............................................................160 5...............................................................200 6...............................................................230 7...............................................................255 8...............................................................275 9...............................................................290 10.............................................................300 11..............................................................305 Assume the table shown is for a hat factory and shows the total production of hats given various numbers of employees. What is the marginal product of the fifth worker? A. 40 B. 200 C. 30 D. 50
A. 40
Suppose a sandwich shop currently employs four workers and the shop produces 12 sandwiches an hour. A fifth worker gets hired and the shop now produces 15 sandwiches per hour. Which of the following is true? A. The marginal product of the fifth worker is three sandwiches. B. Diminishing marginal product has set in. C. The total product of the sandwich shop is now 27 sandwiches. D. All of the above
A. The marginal product of the fifth worker is three sandwiches.
Returns to scale describes the relationship between the: A. quantity of output and average total cost. B. quantity of output and average variable cost. C. quantity of input and average total cost. D. quantity of input and average fixed cost.
A. quantity of output and average total cost.
Explicit costs are costs that: A. require a firm to spend money. B. are zero when no output is produced. C. do not depend on the quantity of output produced. D. depend on the quantity of output produced.
A. require a firm to spend money.
Mika borrows $100,000 to start up her own beauty shop. She pays 5 percent interest on her loan. In order to account for all costs of her business, Mika must not forget: A. the implicit cost of $100,000. B. the implicit cost of $5,000. C. the explicit cost of $105,000. D. the explicit cost of $5,000.
A. the implicit cost of 4000
The long run is: A. the period in which all inputs can be changed. B. one year. C. the period in which all inputs are fixed. D. five years.
A. the period in which all inputs can be changed.
Suppose you are evaluating the profit earned by a pharmaceutical company that produces three different medicines. What values below will help you determine the company's revenue? A. Price B. Variable cost C. Marginal cost D. Quantity E. Fixed cost
A., D.
Accounting profits can tell a business _______________________, and economic profits can tell a business ______________________. A. if it can make more money with a different venture; if it is making money with this venture B. if it is making money with this venture; if it can make more money with a different venture C. if it is a profitable business; if it can be any more profitable D. if it can be any more profitable; if it is profitable
B. if it is making money with this venture; if it can make more money with a different venture
A flat portion of an average total cost curve represents the various different levels of output at which the firm achieves: A. diseconomies of scale. B. economies of scale. C. decreasing returns to scale. D. constant returns to scale.
D. constant returns to scale.
Variable costs are: A. one-time costs. B. costs that don't depend on the quantity of output produced. C. None are correct. D. costs that depend on the quantity of output produced.
D. costs that depend on the quantity of output produced.
Profit is the: A. ratio of total revenue and total cost. B. product of total revenue and total cost. C. sum of total revenue and total cost. D. difference between total revenue and total cost.
D. difference between total revenue and total cost.
Marginal cost is: A. the total cost a firm will incur by producing a given level of output. B. the additional output a firm will get by employing one additional unit of input. C. the costs that sit on the margin, that do not change regardless of the level of output. D. the additional cost a firm will incur by producing one additional unit of output.
D. the additional cost a firm will incur by producing one additional unit of output.
The principle of diminishing marginal product states: A. the total output produced decreases as the quantity of the input increases. B. the marginal product of an input eventually will be negative. C. the total output produced increases as the quantity of the input increases. D. the marginal product of an input decreases as the quantity of the input increases.
D. the marginal product of an input decreases as the quantity of the input increases.
A hair salon offers three services: haircuts, color treatment, and styling. The salon charges $40 for a cut, $65 for color, and $30 for styling. Last month, the salon sold 68 haircuts, 36 color treatments, and 22 styling sessions. If the salon's costs for the month totaled $2851, what was its profit?
Total revenue = (Q1 × P1) + (Q2 × P2) + ... + (Qn × Pn) Profit = Total revenue - Total cost For the hair salon, then: Profit = [(68 × $40) + (36 × $65) + (22 × $30)] $2851 Profit = ($2720 + $2340 + $660) - $2851 Profit = $5720 - $2851 Profit = $2869
variable costs
costs that depend on the quantity of output produced
fixed costs
costs that do not depend on the quantity of output produced
implicit costs
costs that represent forgone opportunities
explicit costs
costs that require a firm to spend money
diseconomies of scale
returns that occur when an increase in the quantity of output increases average total cost
constant returns to scale
returns that occur when average total cost does not depend on the quantity of output
total revenue
the amount that a firm receives from the sale of goods or services; calculated as the quantity sold multiplied by the price paid per unit
marginal product
the increase in output that is generated by an additional unit of input
efficient scale
the quantity of output at which average total cost is minimized
Marginal Product diminishes after the _____ programmer. *Marginal Product* ..................-..................... ..................2..................... ..................4..................... ..................8..................... ...................6.................... ...................4.................... ...................2....................
third; Marginal product diminishes, which decreases from 8 with 3 programmers to 6 with 4 programmers, so MP diminishes after the third programmer.
economic profit
total revenue minus all opportunity costs, explicit and implicit
total cost
• the amount that a firm pays for all its inputs that go into producing goods and services • TC = FC + VC
average variable cost
• variable cost divided by the quantity of output • AVC = VC ÷ Q