ECON Chapter 13

the output level associated with the low point of the average total cost curve is called the

capacity of the firm

Scenario 3: Irving and his wife Gertrude decide to take their life savings of $20,000 to buy a small retail shop. They plan to make and sell tie-dyed, University of Kentucky T-shirts. They hire a professional tie-dyer for $6.00 an hour who makes 20 t-shirts per hour. The following are needed to produce the shirts: dye, costing $1 per shirt, plain white t-shirts costing $1 each and an industrial washing machine for $1000. The total cost to produce 100 T-shirts is: A) $21,230 B) $230 C) $1,230 D) $21,000

A) $21,230

If you know that with 10 units of output, average fixed cost is $12.50 and average variable cost is $82.50, then total cost at this output level is: A) $950 B) $93.75 C) $880 D) $97.78

A) $950

Suppose you are going to throw a party for a event. determine below if the expenses are considered fixed or variable costs: event rental space A) fixed cost B) variable cost

A) fixed cost

Which of the following is a "long run" production decision? A) should we open a new branch office of our business in another city? B) should we stay open until 10:00 p.m. instead of 9:00 p.m. ? C) how many workers do we schedule to come in this week? D) should deliveries be made to the front entrance of the store or the rear entrance?

A) should we open a new branch office of our business in another city?

A short- run production function assumes that... A) the usage of at least one input is fixed B) the level of output is fixed C) all inputs are fixed inputs D) both a and b E) both b and c

A) the usage of at least one input is fixed

Charles lives in Chicago and runs a business that sells boats. In an average year, he receives $723,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Charles does not operate this boat business, he can work as a financial advisor, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this boat business. Complete the following table by determining Charles's accounting and economic profit of his boat business.

Accounting Profit = Total Revenue - Total Explicit Costs = $723,000 - ($423,000 + $267,000) = $33,000 Economic Profit = Total Revenue - Total Costs = Total Revenue - (Total Explicit costs + Total Implicit Costs) = $723,000 - ( ($423,000 + $267,000) + ($20,000 + $2,000) ) = $11,000

Charles lives in Chicago and runs a business that sells boats. In an average year, he receives $723,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Charles does not operate this boat business, he can work as a financial advisor, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this boat business. Identify each of Charles's costs in the following table as either an implicit cost or an explicit cost of selling boats. The salary Charles could earn if he worked as a financial advisor

Implicit Cost

as quantity increases, fixed inputs ?

remain unchanged

the maximum total output ( measured in units of the product) that can be produced from a given level of fixed and variable inputs

total product

average product =

total product / amount of input

amount a firm receives for the sale of its output

total revenue

profit =

total revenue - total cost

economic profit =

total revenue - total costs (explicit and implicit costs)

accounting profit =

total revenue - total explicit costs (does not include opportunity costs)

The law of diminishing marginal product of labor is demonstrated by which of the following? A) Total output declines as you increase the quantity of labor B) Total output increases at a decreasing rate as you increase the quantity of labor C) Total output increases only when you increase both labor and ovens

B) Total output increases at a decreasing rate as you increase the quantity of labor

The marginal product of labor is the change in total product caused by A) a one-unit increase in both the quantity of labor and the quantity of capital employed B) a one- unit increase in the quantity of labor employed, holding the quantity of capital constant C) a change in the cost of labor D) a one- unit increase in the quantity of capital employed, holding the quantity of labor constant

B) a one- unit increase in the quantity of labor employed, holding the quantity of capital constant (The marginal product of labor is the change in total product caused by a one-unit increase in the quantity of labor employed, holding the quantity of capital fixed. The marginal product of capital would show the change in total product caused by a one-unit change in capital holding other inputs constant.)

Which of the following best represents a long run adjustment: A) the extra dose of fertilizer used by a farmer on his wheat crop B) the construction by an automobile manufacturer of a new plant to produce small cars C) a cutback on purchases of coke and iron ore by a steel manufacturer D) the hiring of 4 additional cashiers by a supermarket

B) the construction by an automobile manufacturer of a new plant to produce small cars (The construction by an automobile manufacturer of a new plant to produce small cars best represents a long run adjustment.)

Marginal cost is A) All costs associated with fixed inputs B) the increase in total cost resulting from a one- unit increase in output C) all costs associated with the production of goods D) all costs that vary with output

B) the increase in total cost resulting from a one- unit increase in output

Suppose you are going to throw a party for a event. determine below if the expenses are considered fixed or variable costs: food and drink A) fixed cost B) variable cost

B) variable cost

Don Franklin recently bought the Hyundai dealership in Lexington, which of the following is not a variable cost he will face when running his business? A) Hiring salespeople B) Purchasing complimentary beverages for service customers C) Making payments on the facility D) Purchasing inventory

C) Making payments on the facility (Each of the other options are variable costs because he can adjust them in the short run as the market fluctuates. Facility payments (rent) is a fixed cost because he cannot change the amount of his payments in the short run. Only in the long run can he adjust his payments on the facility)

What is a business most likely to experience after an increase in unit costs following a rise in the scale of operation? A) growth B) economics of scale C) diseconomies of scale D) constant returns to scale

C) diseconomies of scale

The principal- agent problem describes a situation where: A) firms achieve high profits because of managerial competence B) shareholders prevent manager from maximizing profits C) managers follow their own inclinations, which often differ from the aims of shareholders D) firms fail to maximize long- term investment

C) managers follow their own inclinations, which often differ from the aims of shareholders

If average product is decreasing, then marginal product .... A) must be increasing B) must be greater than average product C) must be less than average product D) cannot be decreasing

C) must be less than average product

Which one of the following statements is false? A) average fixed cost plus average variable cost equals average total cost B) average total cost is total cost per unit of output C) total cost equals total fixed cost plus total average cost D) marginal cost is the increase in total cost resulting from a unit increase in output

C) total cost equals total fixed cost plus total average cost

Scenario 3: Irving and his wife Gertrude decide to take their life savings of $20,000 to buy a small retail shop. They plan to make and sell tie-dyed, University of Kentucky T-shirts. They hire a professional tie-dyer for $6.00 an hour who makes 20 t-shirts per hour. The following are needed to produce the shirts: dye, costing $1 per shirt, plain white t-shirts costing $1 each and an industrial washing machine for $1000. What is the marginal cost of producing one additional T-shirt? A) $2.00 B) $8.00 C) $12.30 D) $2.30

D) $2.30 (The marginal or additional cost of making one more t-shirt is $1 for the shirt + $1 for dye + 30 cents in labor cost. = $2.30)

The marginal cost (MC) curve intersects the: A) ATC curve at its maximizing point B) ATC, AVC, AFC curves at their minimum points C) AVC and AFC curves at their minimum points D) ATC and AVC curves at their minimum points E) ATC and AFC curves at their minimum points

D) ATC and AVC curves at their minimum points

The Toyota plant in Georgetown is considering adjusting their production inputs to produce more Camry's. Which of the following is a long run adjustment? A) Hiring more people to work with the detail crew B) Purchasing more steel to have at- hand C) Hiring another shift of workers D) Adding an assembly line dedicated to the Camry

D) Adding an assembly line dedicated to the Camry (An assembly line is a fixed input, and so must be adjusted in the long run. The options are variable inputs and so may be adjusted in the short run.)

Scenario 3: Irving and his wife Gertrude decide to take their life savings of $20,000 to buy a small retail shop. They plan to make and sell tie-dyed, University of Kentucky T-shirts. They hire a professional tie-dyer for $6.00 an hour who makes 20 t-shirts per hour. The following are needed to produce the shirts: dye, costing $1 per shirt, plain white t-shirts costing $1 each and an industrial washing machine for $1000. The following represent fixed inputs in the short run for Irving and Gertrude: A) Retail shop and T-shirts B) Professional tie-dyer and dye C) Professional tie- dyer and washing machine D) Retail shop and washing machine

D) Retail shop and washing machine

In an agency relationship between a bank manager and a bank teller, the manager is A) an agent and the teller is a principal B) an agent, as is the teller C) a principal, as is the teller D) a principal and the teller is an agent

D) a principal and the teller is an agent (In an agency relationship between a bank manager and a bank teller, the manager is the principal and the teller is the agent. The principal (manager) has hired the agent (teller) to do a job. The principal-agent problem is when the teller does not do the job in the way that the manager wishes it to be done. If the teller does not do the job as he is told to or if he goofs off, we say that he is "shirking.")

Diminishing marginal productivity.... A) occurs when the marginal product curve begins to slope downward B) occurs eventually because each additional unit of the variable input has, an average, fewer units of the fixed input with which to work C) occurs when adding one more unit of the variable input reduces total product D) both a and b E) both a and c

D) both a and b

Sunk costs are: A) costs associated with current operational decisions B) costs that add to the firm's marginal costs C) costs that form the major component of the firm's variable cost D) costs that have already been incurred as the result of past decisions

D) costs that have already been incurred as the result of past decisions

which of the following statements is true about the short run and the long run? A) in the long run all costs are fixed; in the short run some costs are fixed B) economists typically refer to the short run as a period of time in which the firm does not have sufficient time to change the amounts of any of its inputs C) the long run refers to a production planning period of longer than one year D) the short run is a period of time less than 6 months E) in the long run all inputs are variable; in the short run at least one input is fixed

E) in the long run all inputs are variable; in the short run at least one input is fixed

Charles lives in Chicago and runs a business that sells boats. In an average year, he receives $723,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Charles does not operate this boat business, he can work as a financial advisor, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this boat business. Identify each of Charles's costs in the following table as either an implicit cost or an explicit cost of selling boats. The wages and utility bills that Charles pays

Explicit cost

Charles lives in Chicago and runs a business that sells boats. In an average year, he receives $723,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Charles does not operate this boat business, he can work as a financial advisor, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this boat business. Identify each of Charles's costs in the following table as either an implicit cost or an explicit cost of selling boats. The wholesale cost for the boats that Charles pays the manufacturer

Explicit cost

total revenue =

Price x Quantity

total fixed cost =

Total cost - Total variable cost

- costs of inputs - interest payments on loans - depreciation

accounting costs

explicit costs- input costs that require an outlay of money by the firm

accounting costs

marginal cost =

change in total cost / change in quantity

marginal product =

change in total product/ change in input

average total cost stays the same as quantity increases

constant returns to scale

20% of firms and 84% of revenue

corporation

limited liability

corporation

multiple shareholders

corporation

the property whereby the marginal product of an input declines as the quantity of the input increases

diminishing marginal product

the upward sloping half of the average total cost curve reflects ?

diminishing marginal returns

total product still increases, but by smaller and smaller amounts

diminishing marginal returns

- organizational complexity (firm gets too big) - more opportunities for shrinking - more costly to have additional monitoring - loss of team spirit or morale in the workplace

diseconomies of scale

average total cost rises as quantity increases

diseconomies of scale

- forgone interest (on funds used for business) - implicit rental rate (value of your property and capital equipment if you used it elsewhere and were paid for it) - opportunity cost (of manager's or owner's time)

economic costs

opportunity costs, avoidable costs, imputed costs or implicit costs - input costs that do not require an outlay of money by the firm

economic costs

average total cost falls as quantity increases

economies of scale

- high startup costs (minimum efficient scale of production) - adopt mass production techniques - specialization and division of labor - learning by doing - quantity discounts - economies of scope

economies of scale reasons

if a firm is producing less than the capacity of the firm output level they are said to have

excess capacity

Inputs in the Short Run

factors of production

land- natural resources labor- human resources capital- machines, building entrepreneurial skills

factors of production

MPL < APL - AP is ?

falling

When MC < ATC, ATC is

falling

an institution that hires factors of production and organizes them to produce and sell goods and services

firm

inputs that cannot be changed in the short run

fixed inputs

machinery, buildings, land, and capital

fixed inputs

Charles lives in Chicago and runs a business that sells boats. In an average year, he receives $723,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $423,000; he also pays wages and utility bills totaling $267,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Charles does not operate this boat business, he can work as a financial advisor, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $2,000 per year rate. No other costs are incurred in running this boat business. Identify each of Charles's costs in the following table as either an implicit cost or an explicit cost of selling boats. The rental income charles could receive if he chose to rent out his showroom

implicit cost

as quantity increases, variable inputs ?

increase

at output levels greater than *, total cost is increasing at an increasing rate because total product is ?

increasing at a decreasing rate

as labor increases by additional units, Total product increases by larger and larger amounts

increasing marginal returns

the downward sloping part of the average total cost curve reflects ?

increasing marginal returns

up to the point of diminishing average productivity, it is ?, but beyond that point, it is ?

increasing, decreasing

all inputs are variable in the ?

long run

is a time period sufficient for all inputs used in a productive process to be variable, and we can choose from all possible production techniques

long run

the costs of producing one more unit of a good or service, which is equal to the change in total costs of production incurred by producing one more unit

marginal cost

change in total output that occurs when an additional unit of that factor is employed

marginal product

if economic profits are 0, we say that we are earning a ?

normal profit or normal rate of return

2 or more individual owners

partnership

8% of firms and 12% of revenue

partnership

the level of output where the average product of labor reaches its peak, somewhere between 9 and 12 units of output, is called the

point of diminishing average productivity

outputs in the short run

production function

the technological relationship that exists between the quantity of inputs employed and the quantity of output produced

production function

72% of firms, but 4% of revenue

proprietorship

single owner

proprietorship

unlimited liability

proprietorship and partnership

MPL > APL - AP is ?

rising

When MC > ATC, ATC is

rising

is a time period short enough that at least one of the inputs is fixed, firm cannot choose from among all possible production techniques

short run

- bad behaviors - lower than possible productivity - not keeping costs low

shrinking

shows the minimum average costs when the firm is free to choose from among all possible capital investments (plant sizes)

the LRATC (long run average total cost curve)

the distance between the average total cost and the average variable curves at each level of output is equal to ?

the average fixed cost at that point

of a variable factor of production is the total product divided by the amount of the variable input that is being employed

the average product

in the postulate that as more and more units of a variable resource are combined with a fixed amount of other resources, employment of additional units of the variable resource will eventually increase output only at a decreasing rate.

the law of diminishing returns (or marginal returns)

up to a point +, total cost increases at a decreasing rate because total product is increasing at an increasing rate.

the relationship between costs and production

the marginal cost curve passes through the average total cost and average variable cost curves at ?

their low points

the amount that the firm pays to buy inputs

total cost

average total cost =

total cost / number of units produced or average variable cost + average fixed cost

are usually considered to be sunk costs or unavoidable costs once they have been incurred

total fixed cost

costs which do not depend on the level of output. they must be paid whether you produce or not.

total fixed cost

the distance between the Total cost and total variable cost curves is always the amount of ?

total fixed cost

Total cost =

total fixed cost + total variable cost

total cost =

total fixed cost + total variable cost

total costs =

total fixed cost + total variable cost

average fixed cost =

total fixed cost/quantity or average total cost - average variable cost

costs which depend on the level of output.

total variable cost

these costs are 0 if you dont actually produce anything

total variable cost

average variable cost =

total variable cost / quantity

these costs are considered opportunity costs or avoidable costs

total variable costs

True or False: The shape of the production function reflects the law of diminishing marginal returns.

true

- proprietorship - partnership - corporation

types of firms

short run average total cost curves are ? due to increasing and decreasing marginal returns

u- shaped

inputs that can be changed in the short run

variable inputs

labor and materials

variable inputs

- payment schemes - monitoring - precautionary measures

ways to try to control shrinking