[Exam 2] Chapter 11 Techonology, Production & Costs
Sally looks at her college transcript and says to you, "How is this possible? My grade point average (GPA) for this semester's courses is higher than my GPA for last semester's courses, but my cumulative GPA still went down from last semester to this semester." Part 2 Explain to Sally how this is possible.
Sally's GPA for this semester is lower than her cumulative GPA.
The short-run average cost can never be less the long-run average costs because
in the long run, all inputs are adjusted including the ones that are fixed in the short run.
In 2012, then Barnes & Noble CEO William Lynch predicted that although the firm was suffering losses in selling its Nook tablet, "the Nook business will scale in fiscal 2013, reducing losses from last year." When Lynch said that "the Nook business will scale," he meant the Nook business will As production levels increase, the Nook would become more profitable because
increase in size gaining economy of scale advantages. average cost per unit will fall.
Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be ___________.
increasing
Average variable cost
variable cost divided by the quantity of output produced
Suppose the total cost of producing 20,000 tennis balls is $50,000, and the fixed cost is $5,000. What is the variable cost? $__,____. (Enter a numeric response using an integer.) When output is 20,000, what is the average variable cost? $_.__(Enter a numeric response using a real number rounded to two decimal places.) When output is 20,000, what is the average fixed cost? $_.__ (Enter a numeric response using a real number rounded to two decimal places.) Assuming that the cost curves have the usual shape, the dollar difference between average total costs and average variable costs _________ as output increases.
$45,000 $2.25 $0.25 decreases
Refer to the to graph on the right. Which level of output in the graph below represents the minimum efficient scale? Which size bookstore is more likely to experience diseconomies of scale?
20,000 books A bookstore selling 80,000 books per month Graph: https://imgur.com/a/ho5t8PQ
Diseconomies of scale apply only in the long run, when the firm is free to vary all its inputs, can adopt new technology, and can vary the amount of machinery it uses and the size of its facility. Diseconomies of scale explain why long-run average cost curves eventually slope upward.
Graph https://imgur.com/a/NfV2f5k
Variable cost
Costs that change as output changes. Costs that vary with output (amount produced) Examples: materials ingredients supplies labor costs utilities
Fixed cost
Costs that remain constant as output changes. Costs that don't vary with output (amount produced) Examples: equipment salary/wages electricity? taxes insurance internet advertising
Suppose that Henry Ford had continued to experience increasing returns to scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry. Ford could have profitably sold his cars at a lower price than competitors. Ford would have been able to produce his cars at lower long-run average cost than competitors. Ford would not have experienced diminishing returns as quickly in the production process. Ford would have built successively larger factories, incurring a higher average fixed cost of production.
Ford could have profitably sold his cars at a lower price than competitors. Ford would have been able to produce his cars at lower long-run average cost than competitors. Both a and b.
Diminishing returns applies only to the short run, when at least one of the firm's inputs, such as the quantity of machinery it uses, is fixed. The law of diminishing returns tells us that in the short run, hiring more workers will, at some point, result in less additional output. Diminishing returns explains why marginal cost curves eventually slope upward.
Graph https://imgur.com/a/NfV2f5k
If Jill expects to produce 1,350 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain.
Jill should build a larger restaurant because average total costs will be lower than for a smaller restaurant.
If Jill expects to produce 1,300 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain.
Jill should build a larger restaurant because average total costs will be lower than for a smaller restaurant.
If Jill expects to produce 200 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain.
Jill should build a smaller restaurant because average total costs will be lower than for a larger restaurant.
If Jill expects to produce 300 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain.
Jill should build a smaller restaurant because average total costs will be lower than for a larger restaurant.
When marginal cost is less than average total cost, average total cost falls. When marginal cost is greater than average total cost, average total cost rises. Therefore, the average total cost curve also has a U shape.
MC < ATC = to Atc cost Falls MC > ATC = to Atc cost Rises
Marginal product of labor(MPL) FORMULA
Quantity output / Quantity workers
A student asks, "If the average cost of producing pizzas is lower in the larger restaurant when Jill produces 1,100 pizzas per week, why isn't it also lower when Jill produces 500 per week?" Give a brief answer to the student's question.
The larger restaurant has higher fixed costs than the smaller restaurant.
Average Total Cost (ATC)
Total cost / Quantity of output
Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.
Explicit cost A.K.A accounting lost When a firm spends money, it incurs an explicit cost
a cost that involves spending money Examples: actual money spent accounting costs
long-run average cost curve
a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
Implicit costs
a nonmonetary opportunity cost.
The firm
an organization that produces a good or service.
All of the following cost measures reach their minimum points when they are equal to the value of marginal cost, except one. Which cost measure is the exception?
average fixed cost
Economies of scale happen when the firm's long run average total cost ________ as output increases.
decreases
Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be __________.
decreasing
It's unusual to find a large corporation that's efficient ... When you get an inside look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work. Pickens was describing
diseconomies of scale, because he is referring to the inefficieny of a large scale business operation.
Economic cost
explicit + implicit
Average fixed cost
fixed cost divided by the quantity of output produced.
The GPA you earn in a particular semester is your ________ GPA, and your cumulative GPA for all completed semesters is your ________ GPA.
marginal; average
The marginal cost curve intersects both the average variable cost and the average total cost curves at their _______ points.
minimum
The ATC and MC curves drawn to the right have their expected shapes because
the ATC curve is U shaped. the MC curve is passing through the minimum point of the ATC curve. as the ATC curve falls, the MC curve lies below it and when the ATC curve rises, the MC curve lies above it. all of the above are true.
Marginal cost
the additional cost to a firm of producing one more unit of a good or service.
Marginal product of labor(MPL)
the additional output a firm produces as a result of hiring one more worker.
Total cost
the cost of all the inputs a firm uses in production. Fixed cost + Variable cost
Opportunity cost
the highest-valued alternative that must be given up to engage in an activity.
minimum efficient scale
the level of output at which all economies of scale are exhausted.
Short run
the period of time during which at least one of a firm's inputs is fixed. Example: Lease of a building
Long run
the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant. Example: technology physical space employees etc
Law of diminishing returns
the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
Techonology
the process the firm uses to turn inputs into outpurts of goods or services.
Constant return to scale
the situation in which a firm's long-run average costs remain unchanged as it increases output.
diseconomies of scale.
the situation in which a firm's long-run average costs rise as the firm increases output.
economies of scale
the situation when a firm's long-run average costs fall as it increases the quantity of output it produces.
Average product of labor, APL
the total output produced by a firm divided by the quantity of workers Q-output / Q-workers.
Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long run, when no inputs are fixed?
the long-run average cost curve
Economies of scale occur For which of the following reason(s) may firms experience economies of scale? Firm's production may increase with a smaller proportional increase in at least one input. Both managers and workers may become more specialized and hence more productive as output expands. Large firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate.
when a firm's long-run average costs decrease with output. Firm's production may increase with a smaller proportional increase in at least one input. Both managers and workers may become more specialized and hence more productive as output expands. Large firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate. ^^^^All of the above.
Explain why the marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum. The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because
when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the averge, it pulls the average up.
Is Jill Johnson correct when she says the following: "I am currently producing 10,000 pizzas per month at a total cost of $60,000. If I produce 10,001 pizzas, my total cost will rise to $60,050. Therefore, my marginal cost of producing pizzas must be increasing."
Jill's average total cost of production is increasing, so her marginal cost of producing pizzas must be increasing.
As output increases, the vertical distance between average total cost and average variable cost curves gets _______ and equals _______.
smaller; average fixed cost
