Chapter 13 A+ test prep

Frida operates Frida's FroYo and spends $1,200 per week on frozen yogurt, $18 per week on cardboard bowls, $3 per week on spoons, $77 per week on candy and other toppings, and $2,300 on rent for the storefront and equipment. Frida sells her frozen yogurt for $4 per serving and she sells 1,500 servings per week. Frida's total cost is a.$3,598. b.$2,402. c.$2.40. d.$6,000.

a. $3,598. Total cost is the market value of the inputs a firm uses in production. Frida's total cost is ($1,200 + $18 +$3 + $77 + $2,300 = $3,598).

Refer to the Figure. The graph illustrates the firm's production function. Based on its shape, what does the corresponding total-cost curve look like? a. an upward-sloping curve that increases at an increasing rate b. a horizontal straight line c. an upward-sloping curve that increases at a constant rate d. an upward-sloping curve that increases at a decreasing rate

a. an upward-sloping curve that increases at an increasing rate

Mitch opened a new shop that sells golf equipment and private lessons. If Mitch is a typical firm owner, he will make decisions that will result in a. the greatest level of profit, even if that means higher costs. b. bringing in the greatest amount of revenue, even if that means higher costs. c. making the most consumers happy, even if that means he incurs a loss. d. reducing his cost to the lowest possible level, even if that means reducing profit.

a. the greatest level of profit, even if that means higher costs.

accounting profit equation

total revenue - explicit costs

marginal cost formula

change in total cost / change in quantity of output

Fixed Cost (FC)

cost that does not vary with the quantity produced

variable costs

costs that vary with the quantity of output produced

Refer to the Figure. Curve A is always declining because a .marginal product first decreases, then increases. b. of increasing marginal product. c. of diminishing marginal product. d .we are dividing fixed costs by higher and higher levels of output.

d .we are dividing fixed costs by higher and higher levels of output. Average fixed cost (curve A) always declines as output rises because the fixed costs are divided by higher and higher levels of output.

implicit costs

input costs that do not require an outlay of money by the firm

explicit costs

input costs that require an outlay of money by the firm

marginal product

the increase in output that arises from an additional unit of input

variable cost formula

total cost - fixed cost

Assuming that implicit costs are positive, economic profit is greater than accounting profit. True False

False Accounting profit equals total revenues minus explicit costs. Economic profit equals total revenues minus both explicit and implicit costs. Assuming that implicit costs are positive, accounting profit is greater than economic profit.

Gian Carlo used to work as an architect for $50,000 per year but quit in order to start his own photography business. To invest in his photography business, he withdrew $20,000 from his savings, which paid 2% interest, and borrowed $40,000 from his brother, whom he pays 3% interest per year. Last year Gian Carlo paid $10,000 for supplies and had revenues of $70,000. Gian Carlo asked William the accountant and Henry the economist to calculate his photography business's annual costs. a. William says his costs are $61,600, and Henry says his costs are $61,600. b. William says his costs are $10,000, and Henry says his costs are $61,600. c. William says his costs are $11,200, and Henry says his costs are $61,600. d. William says his costs are $10,000, and Henry says his costs are $120,000.

c. William says his costs are $11,200, and Henry says his costs are $61,600. the accountant, will add up the explicit costs. In this case, the cost of supplies ($10,000) plus the interest paid to his brother (0.03 x $40,000 = $1,200), or $10,000 + $1,200 = $11,200. Henry, the economist, will also include implicit costs , could've earned if he wasn't running his own photography business ($50,000) and the interest he could've earned by keeping his money in the bank (0.02 x $20,000 = $400). Therefore, Henry says costs are $11,200 + $50,000 + $400 = $61,600.

Diminishing marginal productivity implies that total output decreases as the quantity of the input increases. True False

false Diminishing marginal productivity implies that the marginal product of an input declines as the quantity of the input increases. Even though marginal product declines, it is positive, so total output increases.

Total Cost Equation

fixed cost + variable cost

Stefanie borrows $10,000 from a bank and withdraws $5,000 from her personal savings to start a cupcakery. The interest rate is 5% for both the bank loan and her personal savings. Her opportunity cost of capital is $750. True False

true Stefanie's opportunity cost of capital is $750 ($15,000 x 0.05).