Final Exam Prep: Review|Chapters 13-14

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Define average total cost.

total cost divided by quantity of output

How and why does a firm's average-total-cost curve differ in the short run and in the long run?

A firms costs often depend on the time horizon considered therefore many costs are fixed in the short run but variable in the long run. As a result, when the firm changes its level of production average total cost may rise more in the short run than in the long run.

Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?

Because accountants only consider explicit costs, implicit opportunity costs such as the wages an individual may give up by taking another job may be overlooked.

Does a competitive firm's price equal its marginal cost in the short run, in the long run, or both? Explain.

Both because in perfect competition, firms are price takers that aim to maximize profit by choosing to produce at a quantity that sets MR equal to MC. And because MR equals MC, a firm chooses a quantity so that price equals MC.

How are total cost, average total cost, and marginal cost related?

From a firms total cost, two related measures of cost are derived: average total cost and marginal cost.

What are the main characteristics of a competitive market?

Homogeneous product, all firms are price takers, many buyers and sellers, the industry is characterized by freedom of entry and exit, marginal cost equals marginal revenue. Companies in a competitive market tend to operate at the point at which marginal cost equals marginal revenue, or where they break even on the last unit produced.

Does a competitive firm's price equal the minimum of its average total cost in the short run, in the long run, or both? Explain.

In the long run equilibrium, all firms produce at the efficient scale, price equals the minimum average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price.

Under what conditions will a firm exit a market? Explain.

In the long run, when a firm can recover both fixed costs and variable costs, it will choose to exit if the price is less than average total cost.

Under what conditions will a firm shut down temporarily? Explain.

In the short run, when a firm cannot recover its fixed costs, the firm will choose to shut don temporarily if the price of the good is less than the average variable cost.

Are market supply curves typically more elastic in the short run or in the long run? Explain.

Market supply curves are typically more elastic in the long run because number of firms adjust to satisfy quantity demanded at price.

Explain the difference between a firms revenue and its profit. Which do firms maximize?

The difference between a firms revenue and its profit is that while revenue represents quantity times product sold, profit represents net gains. Thus, firms aim to maximize profit so that marginal revenue equals marginal cost. It is important to note that a competitive firms marginal cost curve is also its supply curve.

What is the relationship between a firm's total revenue, profit, and total cost?

The goal of firms is to maximize profit, which equals total revenue minus total cost.

Define total cost.

The market value of the inputs a firm uses in production

Define economies of scale and explain why they might arise.

The property whereby long-run average total cost falls as the quantity of output increases

Define diseconomies of scale and explain why they might arise.

The property whereby long-run total cost rises as the quantity of output increases

Define marginal cost.

the increase in total costs that arises from an extra unit of production


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