Chapter 12: Production and Cost

Fuel is an airline's biggest single expense. When the price of jet fuel rocketed in 2008, airlines switched to newer airplanes with more fuel-efficient engines. How does a technological advance that makes airplane engines more fuel efficient change an airline's total product, marginal product, and average product? 1. A technological advance that makes an airplane engine more fuel efficient ________ an airline's total product and ________ an airline's marginal product. A. increases; increases B. increases; does not change C. does not change; does not change D. does not change; increases ------ 2. An airline's average product ________. A. does not change B. increases C. becomes negative D. decreases

1. A. increases; increases. A technological advance that makes an airplane engine more fuel efficient means that a given quantity of labor can produce greater output — more passenger miles. Total product increases. The marginal product of labor is the increase in total product that results from a one-unit increase in the quantity of labor employed. Marginal product increases. ----- 2. B. increases. The average product of labor equals total product divided by the quantity of labor employed. A technological advance that makes an airplane engine more fuel efficient increases total product. And when total product increases, average product, which is total product divided by the quantity of labor, also increases.

Devlin is a computer programmer who earned $ 35,000 in 2011. But on January 1, 2012 he opened a custom woodworking business . At the end of 2012, Devlin submitted the following information to his accountant. 1. Devlin stopped renting out his cottage for $ 3,000 a year and used it as his woodworking shop . 2.The market value of the cottage increased from $ 98,000 to $ 102,000 . 3. He spent $ 20,000 on materials, phone, utilities, etc. 4. He leased machines for $ 12,000 a year and paid $ 5,000 in wages.. 5. He used $ 10,000 from his bank account, which earns 5 percent a year interest. 6. He borrowed $ 20,000 at 8 percent a year from the bank. 7. He sold $ 100,000 worth of furniture . 8. Normal profit is $ 20,000 a year. Calculate Devlin's opportunity cost of production and his economic profit. ------- 1. Devlin's opportunity cost of production is ______. A. $ 57,000 B. $ 93,100 C. $ 54,500 D. $ 38,600 ------ 2. Devlin's economic profit is ______. A. $ 45,500 B. $ 6,900 C. $ 20,000 D. $ 61,400

1. B. $ 93,100 2. B. $ 6,900

An Indian clothing manufacturer pays its workers $275 to make 50 pairs of jeans a day. Workers use company-owned equipment that costs $300 in forgone interest and economic depreciation. Materials cost $900. The manufacturer sells the 50 pairs of jeans for $1,650. 1. Which of the manufacturer's costs are explicit costs, and which are implicit costs? The explicit costs are the costs of ________ and the implicit costs are the costs of ________. A. wages and materials; forgone interest and economic depreciation B. wages, materials, and forgone interest; economic depreciation C. forgone interest and economic depreciation; wages and materials D. wages and forgone interest; materials and economic depreciation 2. The manager's economic profit is $__________ per day. a) 1,650 b) 750 c) 175

1. a) wages and materials; forgone interest and economic depreciation. 2. $1,650 - $900 - $300 - $275 = $175

Last year, Ken earned $45,000 selling real estate, but he now sells greeting cards. The return to entrepreneurship in the greeting cards industry is $22,000 a year. During this year, Ken bought $10,000 of greeting cards from manufacturers and sold them for $65,000. Ken rents a shop for $9,000 a year and spends $3,000 on utilities and office expenses. Ken owns a cash register, which he bought for $1,900 with funds from his savings account. The bank pays 4 percent a year on savings accounts. At the end of the year, Ken was offered $1,700 for his cash register. 1. Ken has explicit costs of _________ dollars. a) 23,900 b) 18,100 c) 22,000 2. Ken has implicit costs of _________ dollars. a) 45,200 b) 67,276 c) 46,900 3. Ken's economic profit (total revenue - opportunity cost) is _________ dollars. a) -24,276 b) -2,276 c) 55,000

1. c) 22,000. Ken's explicit costs are costs paid with money. Ken's explicit costs include the money he spends on cards, rent, and utilities, which is: $10,000 + $9,000 + $3,000 = $22,000. 2. b) 67,276. Ken's implicit costs include $45,000 in forgone earnings as a real estate agent, $22,000 of normal profit, and $76 in forgone interest, and $200, which is the economic depreciation (change in market value) of his cash register. This all adds up to $67,276. 3. a) -24,276. Total cost is the sum of explicit costs and implicit costs, which is $22,000 + $67,276 = $89,276. So Ken's economic profit is $65,000 - $89,276 = $-24,276.

(9 of 13- see pic) Ray hires students to mow lawns at $ 450 a week and leases business equipment that costs $ 500 a week. The table shows Ray's total product and total cost schedules. Labor (students) Total product ( lawns per week) Total cost (dollars per week) 0 0 500 1 3 950 2 9 1,400 3 14 1,850 4 18 2,300 5 21 2,750 6 23 3,200 At what output is Ray's average total cost at a minimum? --- Ray's average total cost is at a minimum when he mows __________ lawns a week.

18

(8 of 13- see pic) The table shows a firm's fixed and variable cost schedules. Labor (workers per day) Output (tote bags per day) Total fixed cost Total variable cost (dollars per day) 0 0 20 0 1 4 20 25 2 9 20 50 3 13 20 75 4 16 20 100 5 18 20 125 The firm produces 13 tote bags per day. What is the firm's average total cost of producing a tote bag? The average total cost of producing 13 tote bags per day is ________. A. $7.31 B. $5.77 C. $7.41 D. $7.51

A. $7.31. Average total cost is equal to total cost per unit of output. It is calculated by dividing the total cost by the number of units of output. When the firm produces 13 tote bags per day, total cost is $95. The average total cost of producing a bag is equal to $95 ÷ 13 tote bags, which is $7.31.

Why do accountants and economists calculate a firm's costs and profit in different ways? An accountant calculates a firm's cost and profit to _______. An economist calculates a firm's cost and profit to _______. A. ensure that the firm pays the correct amount of income tax and to show its bank how its loan is being used; enable them to predict the firm's decisions B. measure the economic climate and determine if this is a good time for a private firm to go public; prepare information so that a private firm may go public C. prepare information so that a private firm may go public; measure the economic climate and determine if this is a good time for a private firm to go public D. enable them to predict the firm's decisions; ensure that the firm pays the correct amount of income tax and to show its bank how its loan is being used

A. ensure that the firm pays the correct amount of income tax and to show its bank how its loan is being used; enable them to predict the firm's decisions.

What does a firm do to increase its output? To increase its output, the firm must ________ in the short run, and in the long run, the firm ________. A. increase the quantity of a variable factor of production; is able to change its plant as well as the quantity of labor it hires B. change its technology; is able to change its plant as well as the quantity of labor it hires C. change its technology; can vary any factor of production but it must vary them one factor at a time D. increase the quantity of a variable factor of production; can vary any factor of production but it must vary them one factor at a time

A. increase the quantity of a variable factor of production; is able to change its plant as well as the quantity of labor it hires

Ray leases ladders and then hires students to paint houses. If Ray hires twice as many students and leases twice as many ladders, what do you know about his long-run average cost curve? If Ray experiences economies of scale , his long-run average cost curve ________. A. slopes downward B. is horizontal C. slopes upward D. shifts downward

A. slopes downward. Economies of scale are features of a firm's technology that make average total cost fall as the output rate increases. When Ray experiences economies of scale , his long-run average cost curve slopes downward.

Choose the statement that is correct. A. TC/Q =TFC/Q + TVC/Q B. (TC/Q − TFC/Q) increases over all values of output C. ATC = AVC − AFC D. ATC/Q = TC

A. TC/Q =TFC/Q + TVC/Q Total cost is the sum of total fixed cost and total variable cost. TC =TFC + TVC. If we divide all of the variables by Q, the equality still holds. TC/Q = TFC/Q + TVC/Q. This equation is the same as ATC = AFC+AVC.

______________ Product is the total product per worker employed.

Average

(insert graph 5 of 13) Is it possible for a firm to experience simultaneously an increasing average product and diminishing marginal product? It is ________ because ________. A. possible; when marginal product is decreasing, average product is greater than marginal product because total product is always increasing B. possible; when marginal product exceeds average product and marginal product is decreasing, each additional worker is producing more than the average worker, so average product is increasing C. impossible; when marginal product is decreasing, each additional worker is producing les and less, so average product cannot be increasing D. impossible; when total product is increasing, average product and marginal product are both increasing

B. possible; when marginal product exceeds average product and marginal product is decreasing, each additional worker is producing more than the average worker, so average product is increasing. When 3 workers are hired, the marginal product curve is above the average product curve, and the average product curve is rising. So when 3 workers are hired, the firm experiences simultaneously an increasing average product and diminishing marginal product.

question 3 of , draw graph, insert pic What is the relationship between these short-run cost curves? When the firm produces an output at which marginal cost exceeds the average variable cost but is less than the average total cost, ________. A. fixed cost is increasing B. the average variable cost is increasing while the average total cost is decreasing C. both the average variable cost and the average total cost are increasing D. total variable cost is at its maximum value

B. the average variable cost is increasing while the average total cost is decreasing. When the marginal cost of producing an output exceeds its average variable cost but is less than its average total cost, average variable cost is increasing while average total cost is decreasing.

Ray hires students to sell magazine subscriptions. The table shows Ray's total product schedule. Labor Total product (students) (subscriptions per week) 1 3 2 7 3 12 4 16 5 19 6 21 How does the marginal product of a student change as Ray hires more students? When Ray hires ________, the marginal product decreases. A) each additional student B) the first, second, third, and fourth students C) the fourth, fifth, and sixth students D) the first student

C) the fourth, fifth, and sixth students. Marginal product is the change in total product when an additional student is hired. For example, when Ray increases the number of students from 1 to 2, total product increases from 3 to 7 subscriptions a week. So the marginal product of the second student is 4 subscriptions a week. The table shows that marginal product decreases when Ray hires the fourth, fifth, and sixth students.

When the firm produces the quantity at which average product is at its maximum, which variable is at its minimum? The output at which average product is a maximum is the same output at which ________ is a minimum. A. average total cost B. marginal cost C. average variable cost D. average fixed cost

C. average variable cost. Average product ( AP ) equals output ( Q ) divided by quantity of variable input ( L ). That is, AP = Q ÷ L . But average variable cost ( AVC ) equals total variable cost ( TVC ) divided by output. That is, AVC = TVC ÷ Q . Substituting for Q from the first equation gives AVC = TVC ÷ ( AP × L ) . But TVC = L × Wage rate, so AVC = Wage rate ÷ AP . For a given wage rate, as AP increases, AVC decreases. And as AP decreases, AVC increases. That is, the output at which AP is a maximum is the output at which AVC is a minimum.

Judy hires students to sell magazine subscriptions at $ 400 a week. To run the business, Judy leases equipment that costs $ 450 a week. The table shows Judy's total product schedule. Labor (students) Output ( subscriptions per week) 1 3 2 7 3 12 4 18 What is the gap between her total cost and total variable cost of doing business in the short run? The gap between total cost and total variable cost ________ as output increases because ________. A. varies; the gap equals total variable cost B. varies; the gap equals total variable cost per unit C. is constant; the gap equals total fixed cost D. is constant; the gap equals average fixed cost

C. is constant; the gap equals total fixed cost. In the short run, total cost minus total variable cost equals total fixed cost. The gap between total cost and total variable cost is constant at all outputs because in the short run, total fixed cost is constant.

Total product increases as the number of workers increases. Initially, as more workers are employed, the curve becomes steeper because the marginal product of an additional worker exceeds the marginal product of the previous worker. As the number of workers increases more, the curve becomes less steep because each additional worker adds less to total product than the previous worker. The total product curve begins at the origin and passes through the points (2,4) and (5,16). ----- When does the bakery experience increasing marginal returns? The bakery experiences increasing marginal returns when _______. A. the bakery diversifies its products and sells cakes, brownies, and cookies B. more and more workers use the same workspace C. new workers specialize in different tasks like mixing batter and decorating cakes D. two workers can produce twice as many cakes as one worker

C. new workers specialize in different tasks like mixing batter and decorating cakes. Increasing marginal returns occur when the marginal product of an additional worker exceeds the marginal product of the previous worker.

Matt's factory rents equipment and hires students to produce sports bags. Compare the outputs at which Matt's AVC and ATC curves are at their minimum points. The output at which Matt's AVC curve is a minimum is ________ the output at which his ATC curve is a minimum. This is because initially when decreasing marginal returns set in ________. A. the same as; total fixed cost is decreasing at a faster rate than total variable cost is increasing B. the same as; total variable cost is decreasing at a faster rate than total fixed cost is increasing C. smaller than; average fixed cost is decreasing at a faster rate than average variable cost is increasing D. smaller than; average variable cost is decreasing at a faster rate than average fixed cost is increasing

C. smaller than; average fixed cost is decreasing at a faster rate than average variable cost is increasing. Start with the equation: ATC = AFC + AVC. At small outputs, both AFC and AVC decrease, so ATC decreases. The ATC curve slopes downward. But as output increases further, decreasing marginal returns eventually set in, and AVC begins to increase but AFC is decreasing more quickly than AVC is increasing, so ATC continues to decrease. That is, the AVC curve has passed its minimum point while the ATC curve is still downward sloping. Finally, AVC increases more quickly than AFC decreases, so decreasing marginal returns set in for ATC, and the ATC curve slopes upward. Because decreasing marginal returns set in for AVC at a smaller output than for ATC , the minimum point of the AVC curve occurs at a smaller output than it does for the ATC curve.

In 2020, Beth taught music and earned $ 25,000 . On January 1, 2021, she quit teaching and started a new business. The table gives data on her first year in the new catering business. Table: Data for 2021 1. She stopped renting her basement for $ 4,500 a year and used it as her business office. 2. She paid $ 1,500 for the lease of a delivery van and $ 2,500 for radio and television advertising . 3. She was earning 4 percent a year interest on her bank balance when she used $ 2,000 to buy a professional stove . 4. At the end of 2021, Beth could have sold her professional stove for $ 500 . 5. She received total revenue of $ 40,000 from her new business. 6. Normal profit is $ 50,000 a year ------------- Calculate Beth's explicit costs and implicit costs. Beth's explicit costs are ________ and her implicit costs are ________. A. $ 6,000 ; $ 79,580 B. $ 31,000 ; $ 81,500 C. $ 81,080 ; $ 4,000 D. $ 4,000 ; $ 81,080

D. $ 4,000 ; $ 81,080 ---------- Explicit costs are costs paid with money. Beth's explicit costs include the money spent on the lease of a delivery van and radio and television advertising . So Beth's explicit costs equal $ 1,500 + $ 2,500 , which is $ 4,000 . An implicit cost is an opportunity cost incurred by Beth when she uses a factor of production for which she does not make a direct money payment. Beth's implicit costs include her forgone wages, the money she does not earn because she no longer rents out her basement, the interest she forgoes on her savings account, normal profit, and economic depreciation. Recall that economic depreciation is calculated as the change in the market value of capital. So Beth's implicit costs equal $ 25,000 + $ 4,500 + $ 80 + $ 50,000 + $ 1,500 , which is $ 81,080 .

Which of the following are examples of short-run and long-run decisions? A. Olive Garden has increased its plant. Olive Garden has opened two new restaurants in Ames. B. The profits of HP has improved this year. Students' preferences for HP laptops have changed over time. C. Samsung has adopted a new technology to create a new smartphone. The sale of Samsung phones has increased. D. Starbucks has hired more labor to meet the increasing demand. Starbucks has opened another shop to meet the increasing demand.

D. Starbucks has hired more labor to meet the increasing demand. Starbucks has opened another shop to meet the increasing demand.

What is the relationship between average product and marginal product? A. When marginal product is decreasing, average product is also decreasing. B. When average product is increasing, marginal product is also increasing. C. When average product exceeds marginal product, marginal product increases. D. When marginal product exceeds average product, average product increases.

D. When marginal product exceeds average product, average product increases. Think about the relationship between your marginal grade and your average grade. The same relationship holds between a firm's marginal product and average product.

Why does a firm experience diminishing marginal returns? Marginal returns start to decrease when more and more workers ________. A. require jobs to be too specialized B. produce less and less average product C. produce less and less total output D. have to share the same equipment and workspace

D. have to share the same equipment and workspace. Diminishing marginal returns occur when the marginal product of an additional worker is less than the marginal product of the previous worker. Decreasing marginal returns arise from the fact that more and more workers use the same equipment and workspace.

What is the relationship between a firm's short-run average cost and its marginal cost? If marginal cost exceeds average total cost and output increases, average total cost ________ and average variable cost ________. A. decreases; decreases B. decreases; increases C. increases; decreases D. increases; increases

D. increases; increases. If marginal cost exceeds average total cost, then average total cost increases as output increases. But why does average variable cost increase? Average total cost exceeds average variable cost at each output. So when marginal cost exceeds average total cost, marginal cost also exceeds average variable cost. So when output increases and marginal cost exceeds average total cost, average variable cost increases.

What is a firm's total cost of production? A firm's cost of producing goods and services is the sum of ______. A. all explicit costs and implicit costs, excluding normal profit B. all the costs paid with money, called explicit costs C. the implicit costs of using all the resources owned by the firm D. the costs of all the resources used whether bought or owned by the firm

D. the costs of all the resources used whether bought or owned by the firm. The firm's total cost of production is the sum of all explicit costs and implicit costs of all resources used in production.

________________ marginal returns occur when the marginal product of an additional worker is less than the marginal product of the previous worker

Decreasing

_______________ profit is the reward for her/its entrepreneurship over-and-above normal profits.

Economic

_______________ _______________= total revenue - opportunity cost

Economic profit

________________ marginal returns occur when the marginal product of an additional worker exceeds the marginal product of the previous worker

Increasing

_____________ product is the change in the total quantity of a good produced that results from a one-unit increase in the quantity of labor employed.

Marginal

_______________ profit is the profit that a firm/person could earn supplying her entrepreneurship to another firm. This makes it an opportunity cost because it is the cost of a forgone alternative-running another firm.

Normal

Another name for average product (AP) is ________________.

Productivity

The relationship between marginal product and quantity of labor employed is illustrated using: 1. Marginal Product ____________ 2. Marginal Product ____________

Schedule; Curve

__________ product is the total quantity of a goof produced in a given period. It is an output rate: the number of units produced per hour/day/week etc.

Total

The relationship between output and quantity of labor employed: 1. ____________ Product 2. ____________ Product 3. ____________ Product

Total; Marginal; Average

The opportunity cost of production is the: a) highest valued alternative production b) total opportunity cost

a) highest valued alternative production

Below the total product curve (TP) are ________________ outputs. Above the total product curve (TP) are ________________ outputs

attainable; unattainable

________________ product = total product / quantity of labor

average

Economists predict the firm's ____________. The decisions respond to _____________ cost and _____________ profit.

decisions; opportunity; economic

Economic _________________ is part of the opportunity cost of the firm using capital that it owns.

depreciation

The cost of capital is spread over its life as _________________.

depreciation

The opportunity cost of a factor or production is an ___________ cost if the firm does make direct money payment for its use. implicit explicit

explicit

Opportunity cost includes _____________ costs and _____________ costs.

explicit; implicit

To increase output of a __________ plant, a firm must increase the quantity of labor it employs.

fixed

Normal profit is an _____________ cost.

implicit

The opportunity cost of a factor or production is an ___________ cost if the firm does not make direct money payment for its use. implicit explicit

implicit

Increasing marginal returns ________________ initially, but then ________________.

increase; decrease

Total product ______________ as quantity of labor increases.

increases

For most firms, the fixed resources are ___________ and ___________

land; capital

The ___________ run is the time frame in which the quantities of all resources can be varied.

long

The collection of fixed resources is called the firm's ___________.

plant

To increase output in the long run, a firm must increase the size of its ______________.

plant

All firms hire factors of _________________ and organize them to produce and sell goods and services. They all do this with the goal to maximize _________________

production; profit

Decreasing marginal returns arise from the fact that more and more workers use the same equipment and workspace. As more workers are employed, there is less that is ________________ for the additional worker to do.

productive

Total _____________ = price x quantity sold

revenue

To calculate a firm's profit, we must determine its total _____________ and total __________

revenue; cost

The ___________ run is the time frame in which the quantities of some resources are fixed.

short

Only the ___________ run cost of changing its labor inputs and the ___________ run cost of changing its plant size are relevant to a firm's decisions. long; short short; long

short; long

The source os increasing marginal returns is increased ___________________ and greater ______________ of labor in the production process.

specialization; division

When decreased marginal returns happens, adding a new person has exhausted all the possible gains from ________________ and ________________ of labor.

specialization; division

Average total cost is the __________ of average fixed cost and average variable cost.

sum

Economic depreciation is called a _________ cost to emphasize that it is irrelevant to the firm's _______ run decisions

sunk; short

Economists measure economic profit profit as: ____________ revenue - ________________ cost

total; opportunity

Accountants measure profit as: ____________ revenue - ____________ costs

total; explicit

To increase output in the short run, a firm must increase the quantity of ______________ factors it uses.

variable

The Law of Decreasing Returns states: As a firm uses more of a __________ factor of production (FOP) (input), with a given quantity of ____________ factors of production (inputs), the _____________ product of the variable factor eventually decreases

variable; fixed; marginal