MICRO EXAM 3

Profit

we assume that the firm's goal is to. maximize profit. Profit= Total Revenue- Total Cost

Marginal Product of Labor (MPL)

Δ(delta)= "change in" Δ Q= change in output Δ L= change in labor = ΔQ/ΔL

SUMMARY Part 3

•Marginal cost is the increase in total cost from an extra unit of production. The MC curve is usually upward-sloping. •Average variable cost is variable cost divided by output. •Average fixed cost is fixed cost divided by output. AFC always falls as output increases. •Average total cost (sometimes called "cost per unit") is total cost divided by the quantity of output. The ATC curve is usually U-shaped.

SUMMARY Part 1

- Implicit cost do not involve a cash outlay yet are just as important as explicit costs to firm's decisions. - Accounting profit is revenue minus explicit costs. economic profit is revenue minus total (explicit + Implicit) cost - The production function shows the relationship between outputs and inputs

EX- If you hire and extra worker what will happen to the MPL

- the cost rise by the wage he pays the worker - his output rise by MPL - this will help determine if a business needs to hiree another worker

How ATC changes as the scale of production changes

Economies of scale: ATC falls as Q increases, constant returns to scale: ATC same as Q increases diseconomies of scale: ATC Rises as Q increases

Average Total Cost (ATC)

Equal total cost divided by the quantity output ATC=TC/Q or ATC= AFC+ AVC

Total Cost (TC)

= FC+VC

Economic Profit

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

Accounting profit

= total revenue minus total explicit costs Accounting profit ignores implicit costs, so it's higher than a economic profit.

Cost- Long run

All inputs are variable ( e.x. firms can build more factories or sell existing ones). In the long run, ATC at any Q is cost per unit using the most efficient mix of inputs for that Q ( e.x. the factory size with the lowest ATC.)

Implicit Cost

Do not require a cash outlay. e.x. the opportunity cost of the owner's time.

Fixed Costs (FC)

Do not vary with the quantity of output produced.

LRATC (long run average total cost) w/ 3 factory sizes

Firm can choose from three factory sizes: S,M,L Each size has its own SRATC curve The firm can change to a different factory size in the long run, but not in the short run.

As Q rises:

Initially, falling AFC pulls ATC down Eventually, rising AVC pulls ATC up.

Diseconomies of scale are due to coordination problems in large organizations ( management becomes stretched, can't control cost)

More common when Q is high

Economies of scale occurs when increasing production allows greater specialization: workers more efficient when focusing on a narrow task

More common when Q is low

Cost- Short run

Some inputs are fixed (e.x. factories, land). The costs of these inputs are FC.

Efficient Scale:

That quantity that minimizes ATC.

Marginal cost equals (i) change in total cost divided by change in quantity produced. (ii) change in variable cost divided by change in quantity produced. (iii) the average fixed cost of the current unit. a. (i) and (ii) b. (ii) and (iii) c. (ii) only d. All of the above are correct.

a. (i) and (ii)

Variable Costs (VC)

Vary with the quantity produced

ATC and MC

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.

Refer to Table 13-1. What is the variable cost of producing zero widgets? a. $0 b. $1.00 c. $10.00 d. $10.00

a. $0

Refer to Table 13-1. What is the marginal cost of producing the first widget? a. $1.00 b. $10.00 c. $11.00 d. It can't be determined from the information given.

a. $1.00

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 = 12, Q = 122) and (L = 13, Q = 130). Then the marginal product of the 13th worker is a. 8 units of output. b. 10 units of output. c. 122 units of output. d. 130 units of output.

a. 8 units of output.

One would expect to observe diminishing marginal product of labor when a. crowded office space reduces the productivity of new workers. b. workers are discouraged about the lack of help from other workers. c. only new workers are trained in using the most productive capital. d. union workers are told to reduce their work effort in preparation for a new round of collective bargaining talks.

a. crowded office space reduces the productivity of new workers.

A production function is a relationship between a. inputs and quantity of output. b. inputs and revenue. c. inputs and costs. d. inputs and profit.

a. inputs and quantity of output.

Explicit costs a. require an outlay of money by the firm. b. include all of the firm's opportunity costs. c. include income that is forgone by the firm's owners. d. All of the above are correct.

a. require an outlay of money by the firm.

For a certain firm, the number of workers hired is the only variable input. When this firm's production function is illustrated on a graph, a. the number of workers is measured on the horizontal axis and the quantity of output is measured on the vertical axis. b. the number of workers is measured on the horizontal axis and variable cost is measured on the vertical axis. c. the number of workers is measured on the horizontal axis and profit is measured on the vertical axis. d. total cost is measured on the horizontal axis and the number of workers is measured on the vertical axis.

a. the number of workers is measured on the horizontal axis and the quantity of output is measured on the vertical axis.

Total revenue equals a. total output multiplied by price per unit of output. b. total output divided by profit. c. (total output multiplied by sales price) - inventory surplus. d. (total output multiplied by sales price) - inventory shortage.

a. total output multiplied by price per unit of output.

Economic profit a. will never exceed accounting profit. b. is most often equal to accounting profit. c. is always at least as large as accounting profit. d. is a less complete measure of profitability than accounting profit.

a. will never exceed accounting profit.

Refer to Table 13-1. The average fixed cost of producing five widgets is a. $1.00. b. $2.00. c. $3.00. d. None of the above are correct.

b. $2.00.

Refer to Table 13-1. The average variable cost of producing four widgets is a. $2.00 b. $2.50 c. $3.33 d. $5.00

b. $2.50

Economic profit is equal to (i) total revenue - (explicit costs + implicit costs). (ii) total revenue - opportunity costs. (iii) accounting profit + implicit costs. a. (i) only b. (i) and (ii) c. (ii) and (iii). d. All of the above are correct.

b. (i) and (ii)

Accounting profit is equal to (i) total revenue - implicit costs. (ii) total revenue - opportunity costs. (iii) economic profit + implicit costs. a. (i) only b. (iii) only c. (i) and (ii) d. None of the above are correct.

b. (iii) only

In the long run, a. inputs that were fixed in the short run remain fixed. b. inputs that were fixed in the short run become variable. c. inputs that were variable in the short run become fixed. d. variable inputs are rarely used.

b. inputs that were fixed in the short run become variable.

Economies of scale occur when a. long-run average total costs rise as output increases. b. long-run average total costs fall as output increases. c. average fixed costs are falling. d. average fixed costs are constant.

b. long-run average total costs fall as output increases.

Economists normally assume that the goal of a firm is to a. maximize its total revenue. b. maximize its profit. c. minimize its explicit costs. d. minimize its total cost.

b. maximize its profit.

Refer to Table 13-1. The average total cost of producing one widget is a. $1.00. b. $10.00. c. $11.00. d. $22.00.

c. $11.00.

Refer to Table 13-1. What is the variable cost of producing five widgets? a. $13.00 b. $14.00 c. $15.00 d. It can't be determined from the information given.

c. $15.00

Which of the following is an implicit cost? (i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm (ii) interest paid on the firm's debt (iii) rent paid by the firm to lease office space a. (ii) and (iii) b. (i) and (iii) c. (i) only d. All of the above are correct.

c. (i) only

Which of these assumptions is often realistic for a firm in the short run? a. The firm can vary both the size of its factory and the number of workers it employs. b. The firm can vary the size of its factory, but not the number of workers it employs. c. The firm can vary the number of workers it employs, but not the size of its factory. d. The firm can vary neither the size of its factory nor the number of workers it employs.

c. The firm can vary the number of workers it employs, but not the size of its factory.

The amount of money that a firm receives from the sale of its output is called a. total gross profit. b. total net profit. c. total revenue. d. net revenue.

c. Total Revenue

Marginal cost tells us the a. value of all resources used in a production process. b. marginal increment to profitability when price is constant. c. amount by which total cost rises when output is increased by one unit. d. amount by which output rises when labor is increased by one unit.

c. amount by which total cost rises when output is increased by one unit.

The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is a. an explicit cost. b. an accounting cost c. an implicit cost. d. forgone accounting profit.

c. an implicit cost.

Diseconomies of scale occur when a. average fixed costs are falling. b. average fixed costs are constant. c. long-run average total costs rise as output increases. d. long-run average total costs fall as output increases.

c. long-run average total costs rise as output increases.

John owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? a. wages John could earn washing windows b. dividends John's money was earning in the stock market before John sold his stock and bought a shoe-shine booth c. the cost of shoe polish d. All of the above are correct

c. the cost of shoe polish

Refer to Table 13-1. The marginal cost of producing the sixth widget is a. $1.00. b. $3.50. c. $5.00. d. $6.00.

d. $6.00.

Fixed costs can be defined as costs that a. vary inversely with production. b. vary in proportion with production. c. are incurred only when production is large enough. d. are incurred even if nothing is produced.

d. are incurred even if nothing is produced.

Marginal cost is equal to average total cost when a. average variable cost is falling. b. average fixed cost is rising. c. marginal cost is at its minimum. d. average total cost is at its minimum.

d. average total cost is at its minimum.

The marginal product of labor is equal to the a. incremental cost associated with a one unit increase in labor. b. incremental profit associated with a one unit increase in labor. c. increase in labor necessary to generate a one unit increase in output. d. increase in output obtained from a one unit increase in labor.

d. increase in output obtained from a one unit increase in labor.

When a firm's only variable input is labor, then the slope of the production function measures the a. quantity of labor. b. quantity of output. c. total cost. d. marginal product of labor.

d. marginal product of labor.

Average total cost is equal to a. output/total cost. b. total cost - total quantity of output. c. average variable cost + total fixed cost. d. total cost/output.

d. total cost/output.

Marginal Cost (MC)

is the increase in Total Cos from producing one more unit : MC= ΔTC/ ΔQ

Explicit Cost

require an outlay of money. e.x. 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.

diminishing marginal product

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

SUMMARY Part 4

•The MC curve intersects the ATC curve at minimum average total cost. When MC < ATC, ATC falls as Q rises. When MC > ATC, ATC rises as Q rises. •In the long run, all costs are variable. •Economies of scale: ATC falls as Q rises. Diseconomies of scale: ATC rises as Q rises. Constant returns to scale: ATC remains constant as Q rises.

SUMMARY Part 2

•The marginal product of labor is the increase in output from a one-unit increase in labor, holding other inputs constant. The marginal products of other inputs are defined similarly. •Marginal product usually diminishes as the input increases. Thus, as output rises, the production function becomes flatter, and the total cost curve becomes steeper. •Variable costs vary with output; fixed costs do not.