CH 12
Profit is the
difference between total revenue and total cost.
<blank> costs represent forgone opportunities.
Implicit
When the marginal product lies below the average product curve, the average product curve starts to
decrease
The principle of diminishing marginal product states that the marginal product of an input
decreases as the quantity of the input increases.
Variable costs
depend on the quantity of output produced.
Costs that require a firm to spend money are
explicit costs
Rent on a building, employee salaries, materials, and machines are examples of
explicit costs
Explicit costs include
fixed and variable costs.
Average fixed cost equals
fixed cost divided by quantity of output.
The marginal product of an employee is the
increase in the units of a product that can be produced by hiring an another employee.
When we ask, "What are a firm's wants?", the answer is that it wants to maximize its
profit
Suppose Drink Well produces flavored water in a rented space using their private well, purchased bottles, and hired hourly labor. They buy advertising services from a marketing company for a fee based on sales. Their fixed costs include
rent
Total revenue is the quantity
sold multiplied by the price paid per unit.
A firm's total cost is the
sum of all of its fixed and variable costs.
The long run is
the period in which all inputs can be changed.
The sum of all of its fixed and variable costs is a firm's
total cost
The amount that a firm pays for all of the inputs that go into producing goods and services is the
total cost.
Total revenue minus explicit costs is
Accounting profit
Paola is thinking of opening her own business. For each of the production inputs listed below, indicate whether the input incurs an implicit cost, explicit cost, or no cost.
Rent: Explicit Wages: Explicit Owned equipment: Implicit
Suppose Event Photo Services takes photographs at private events. They process the photos in a permanently rented space and hire hourly labor to arrange shoots and produce the finished photo packages. They buy advertising services from a marketing company for a fee based on sales.Their variable costs include
labor and advertising.
When a firm realizes economies of scale, it can
lower its average cost by producing more output.
A flat portion of an average total cost curve represents the
various different levels of output at which the firm achieves constant returns to scale.
Because economic profit includes both explicit and implicit costs,
accounting profit is larger than economic profit.
When a firm faces constant returns to scale,
an increase in the quantity of output does not change the average total cost.
If a small firm finds that operating on a larger scale causes its average cost to stay the same, the firm is facing
constant returns to scale.
If a small firm finds that operating on a larger scale enables it to lower its average cost, then the firm is facing
economies of scale.
In business, people frequently say, "It's all about the bottom line." What they mean by this is
that making a profit is the central goal of a business.
When a firm could achieve economies of scale by expanding,
the ATC curve decreases as output increases.
Average total cost is rising when
MC > ATC
The pattern of increasing marginal cost is the inevitable flip-side of diminishing marginal product;
as the productivity of each unit of input decreases, it costs more to get another unit of output.
Explicit and implicit costs are
the two components of opportunity cost.
Suppose a firm has a fixed cost of $20,000 and a $5 variable cost for every unit it produces. If it produces 100 units, fixed cost will be equal to $ and variable cost = If it produces 0 units, fixed cost will be equal to $ and variable cost =
$20,000; $500 $20,000; $0
True economic costs are
Opportunity costs
Economic profit is total revenue minus
all explicit and implicit costs.
Average product of labor is the
units of output÷workers.
Suppose Drink Well produces flavored water in a rented space using their private well, purchased bottles, and hired hourly labor. They buy advertising services from a marketing company for a fee based on sales. The owners used $100,000 of their savings to start the company. Implicit costs include
water, and foregone interest on savings.
Gut Bombs sandwich shop pays $5,000 a month in rent space and equipment. It pays each of its 10 workers $2,500 a month and spends $5,000 on food. There are no other production costs. Usually the shop sells 3,500 sandwiches per month for $10 each. The shop could hire another worker and increase the number of sandwiches it makes by 300. Assuming a constant food cost per sandwich of $1.43, their marginal cost per month per sandwich, of making 300 more sandwiches per month, rounded to the nearest penny, is
$9.76. (reason: MC = ($2,500/300) + $1.43)
The relationship between the quantity of output and average total cost is described by which of the following?
Diseconomies of scale Economies of scale Constant returns to scale
The marginal cost is the <blank> cost that will be incurred by producing one additional unit of <blank>
additional; output
Suppose Jump High produces trampolines in a rented space using purchased frames and materials.They also hire labor and buy advertising services from a marketing company for a flat annual fee.Their fixed costs include
advertising and rent.
Suppose Event Photo Services takes photographs at private events with cameras they purchased. They process the photos in a rented space and hire hourly labor to arrange shoots and produce the finished photo packages. They buy advertising services from a marketing company for a flat annual fee.Their fixed costs include
advertising, rent, and cameras.
If a small firm finds that operating on a larger scale causes its average cost to increase, the firm is facing
diseconomies of scale.
Fixed costs are those that
don't depend on the quantity of output produced.
Economists think of the long run as being the period of time
during which a firm can vary all of its inputs and their costs.
The relationship between the quantity of output and average total cost is described by
economies of scale, diseconomies of scale, and constant returns to scale.
When a firm cannot lower its average cost by either increasing or decreasing its scale, it is said to be operating at a(n)
efficient level
Total costs =
fixed costs + variable costs.
The average fixed cost curve trends downward because the
fixed costs remain the same as production increases.
The minimum of the average <blank> cost curve occurs at a higher output level than the minimum of the average variable costs curve because the average <blank> cost is lower than the average <blank> cost and this pulls the average total down
fixed;total
If you use your saved money as your start-up capital, there is an implicit cost because you
give up interest you could have earned on the money in a savings account.
When output is very low, each additional worker has a <blank> marginal product than the last one; but when more workers are added the marginal product starts to <blank>
higher; decrease
Diseconomies of scale are returns that occur when an increase in the quantity of output
increases average total cost.
The marginal cost will eventually increase because the productivity of each unit of
input falls due the principle of diminishing marginal product.
Because initially the first few employees have an increasing marginal product but eventually the principle of diminishing marginal product kicks in, the average variable cost curve
is U-shaped.
The marginal cost curve
is the inverse of the marginal product curve.
Suppose Drink Well produces flavored water in a permanently rented space using their private well, purchased bottles, and hired hourly labor. They buy advertising services from a marketing company for a flat annual fee. Their variable costs include
labor, water, and bottles.
The change in total cost divided by the change in the quantity of output is the
marginal cost.
When a firm realizes diseconomies of scale by expanding,
the ATC curve increases as output increases.
A firm's first few employees tend to have increasing marginal product. At some point, the principle of diminishing marginal product kicks in. As a result,
the average total cost curve is U-shaped.