Econ 2000 Exam 3

average variable cost (AVC) =

VC/Q

Fixed cost

a cost that does not change, no matter how much of a good is produced -costs we still pay even if we produce 0 example: rent

Why do average fixed costs fall as we increase the quantity we produce?

a)Average variable costs are falling b)There are decreasing marginal costs c) The same cost gets divided by a larger quantity d)Output per worker is decreasing

Economic profit =

accounting profit - opportunity cost or Revenue - explicit costs - implicit costs

Perfect price discrimination =

add all of the prices up leading to the quantity

Average total cost is very high when a small amount of output is produced because

average fixed cost is high.

Marginal cost is equal to average total cost when

average total cost is at its minimum.

A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100, Average variable cost is 3

average variable cost is $3.

Accounting profit

only counts explicit costs.

if MC>MR

output should be reduced

Economics profit

counts explicit costs and factors in implicit costs

Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be

$12

It cost me $5 to make the first M&M cookie, $4 to make the second one, and $3 to make the third one. What is my average cost per cookie?

$4

Tom's Tent Company has total fixed costs of $300,000 per year. The firm's average variable cost is $80 for 10,000 tents. At that level of output, the firm's average total costs equal

110

Each worker at the Wooden Chair Factory costs $12 per hour. The cost of each machine is $20 per day regardless of the number of chairs produced. What is the total daily cost of producing at a rate of 55 chairs per hour if the factory operates 8 hours per day? Workers = 5 machines =2

12(8)(5) + 2(20)

Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva charges $25 an hour for her home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce. Refer to Scenario 13-3. What is the total opportunity cost of the day that Farmer Ziva spent in the field planting lettuce?

25(10)+130

Constant returns to scale

ATC does not change as output increases "if inputs double, output doubles" Example: hiring students to sit in seats. Each student hired produces 1 more seat sat in.

Economies of scale

ATC falls as output increases bulk

Diseconomies of scale (decreasing returns)

ATC increases as output increases. "if inputs double, output increases by less than double" Get new computer at small company: owner hands me her credit card Get new computer at big company: fill out Form 49Q, manager approves, administrator files request with IT, IT issues procurement order with Dell rep, ...

AFC =

ATC-AVC

Marginal Cost =

Change in total cost / Change in quantity

Variable Cost

Costs we only pay when we produce something Example: Wages to staff

If the wage > MPL:

Don't hire

Accounting costs and economic costs differ because

Economic costs count implicit and explicit costs while accounting costs include actual dollar outlays (only explicit)

Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is

Economic profit = 347000-163000-223000

Average Fixed Cost (AFC) =

FC/Q

What is the difference between "fixed costs" and "variable costs"?

Fixed: doesnt depend on how much is produced Variable: depends on the amount that is produced

Which of the following explains why long-run average total cost at first decreases as output increases?

Gains from specialization of inputs In thе long run, as output incrеasеs, a firm may еxpеriеncе gains from thе spеcialization of inputs. This mеans that as production еxpands, thе firm bеcomеs morе еfficiеnt in organizing and utilizing its rеsourcеs. Spеcialization allows for morе еfficiеnt usе of labor and othеr inputs, lеading to a dеcrеasе in thе long-run avеragе total cost. This phеnomеnon is oftеn rеfеrrеd to as еconomiеs of scalе.

If the wage < MPL:

Hire

If P>=AVC

Keep business open

if mc>MR

Keep increasing production

Why does MC usually fall at first?

MC usually decreases at first because it is cheaper (per unit) to make several of something than just one. We call this "economies of scale." Like if I'm making 10 salads I can buyproduce in bulk from Costco for cheaper than buying just one carrot, etc.

Profits are maximized when

MR=MC Changing Q would lower profit.

Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product?

Marginal product = (35-20)/(2-1)

perfect price discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.

example of why the marginal product is diminishing?

On the farm, as Jill adds workers, there is less land available per worker. When Farmer Jill hires another worker 1) Her costs rise by the wage she pays the worker 2) Her output rises by MPL If the extra revenue from what the new worker produces is more than the cost of paying that worker, that's a good move. If the extra revenue from what the new worker produces doesn't cover the cost of paying that worker, that's a dumb move. If the wage > MPL: Don't hire If the wage < MPL: Hire

For a competitive firm, Price=

P=Marginal Revenue P=Average Revenue

The firm will earn a negative economic profit but remain in business in the short run if

P>AVC and below the Bottom of ATC

Total Revenue =

Price x Quantity

when MC=MR exactly

Profits stop going up this is the profit maximizing quantity.

FC =

TC-VC

average total cost (ATC) =

TC/Q

explicit cost examples

You need $100,000 to start a business. The interest rate is 5%. borrow all $100,000 explicit cost = $5000 paid in interest

Implicit cost example

You need $100,000 to start a business. The interest rate is 5%. use $40,000 of your savings, borrow the other $60,000 explicit cost = $3000 (5%) interest you pay implicit cost = $2000 (5%) (interest you could have earned from the bank for depositing your $40,000)

marginal revenue =

change in total revenue / change in quantity

Marginal cost usually rises with output, because of __________________

diminishing marginal product

if the output per worker falls as we add workers, this means we have __________

diminishing marginal returns

If long-run average total cost decreases as the quantity of output increases, the firm is experiencing

economics of scale

If long-run average total cost decreases as the quantity of output increases, the firm is experiencing -marginal cost usually decreases at first because its cheaper to produce in bulk than to make one

economics of scale

In the long run a company that produces and sells popcorn incurs total costs of $1,050 when output is 90 canisters and $1,200 when output is 120 canisters. The popcorn company exhibits

economies of scale because average total cost is falling as output rises. 1050/90=11.66 1200/120=10

If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will

exactly triple

A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will

fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. This is because firms are producing at their minimum average total cost and are earning zero economic profit in the long run equilibrium. When demand decreases, the price falls and the firms will experience negative economic profit. Some firms may choose to shut down, but some of them will exit the industry, which will cause a decrease in supply and an increase in price. This process will continue until the new long-run equilibrium is reached, where the remaining firms are once again earning zero economic profit.

Total Cost =

fixed cost + variable cost or explicit cost + Implicit cost

marginal product (Slope)

how much more output we get from using one more input. -slope of the production function

A difference between explicit and implicit costs is that

implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will

increase price in the short run but not in the long run.

marginal product ________ As the number of workers increases,

input declines as the quantity of the input increase

When a factory is operating in the short run,

it cannot adjust the quantity of fixed inputs. This is because fixed inputs are typically difficult or costly to alter in the short run. In the short run, a firm is constrained by the fixed inputs it has already committed to, such as the size of its factory or the number of machines. Fixed inputs cannot be easily changed in the short run. However, the firm can adjust variable inputs, such as labor and raw materials.

If VC < TR

keep open

To exit means to completely leave the industry and is a _____________ decision

long run

In order to maximize profits marginal revenue=

marginal cost

If marginal cost is rising,

marginal product must be falling

Ms. Joplin sells colored pencils. The colored-pencil industry is competitive. Ms. Joplin hires a business consultant to analyze her company's financial records. The consultant recommends that Ms. Joplin increase her production. The consultant must have concluded that, at her current level of production, Ms. Joplin's

marginal revenue exceeds her marginal cost.

for sellers, we'll call happiness

profits

If MC > MR

profits go down when producing one more unity reduce Q to raise profit.

If MC < MR

profits go up increase Q to raise profit.

Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to

remain unchanged

Explicit Cost (monetary)

rent, materials, salaries

Accounting profit formula

revenue - explicit costs

shutting down a business while continuing to pay rent is a __________ decision

short run

If P<AVC

shut down

If VC > TR

shut down

Sunk cost

something you already spent and can't get back. -The money you already spent on repairs

In the short run, fixed costs are __________

sunk costs Example: your restaurant has to pay rent whether you open today or not. You should ignore rent when deciding about shutting down.

Marginal Revenue (MR)

the change in total revenue from selling one more unit of a product

If marginal revenue is less than marginal cost

the firm should decrease output

if marginal revenue is greater than marginal cost

the firm should increase its output

Marginal cost

the increase in total cost if we increase quantity by one. The cost of producing the last unit of the good that you make you produce 43 units. If the cost of producing the 43rd unit is $6.50, your marginal cost of that unit is $6.50.

If a firm uses labor to produce output, the firm's production function depicts the relationship between

the number of workers and the quantity of output.

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good It show the relationship between output (quantity of tanks) and the number of workers it takes to produce that output.

Economies, or diseconomies of scale is how we talk about ______________

the relationship between the quantity of output and average total cost.

total opportunity cost

total explicit cost + total implicit cost

Profit =

total revenue - total cost

average revenue

total revenue divided by the quantity sold

for buyers, we called happiness

utility

Implicit opportunity cost

what else you could have done with that time and resources

marginal product of labor

∆Q/∆L