ECN 212 Exam 2

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total revenue minus total cost

profit

Implicit or Explicit: Foregone wages from a different occupation

Implicit

Implicit Examples:

$5,000 of foregone interest on savings, foregone wages from a different occupation

Accounting Profit (AP) =

= Total Revenue - Explicit Costs

Explicit Examples:

A rent payment, $10,000 of interest on a bank loan, flour for baking cookies to sell

Implicit Costs

Do not require a cash outlay (I.e. the opportunity cost of the owners time)

Implicit or Explicit: Flour for baking cookies to sell

Explicit

T/F: The explicit costs of an item include all those things that must be forgone to acquire that item.

Incorrect. The opportunity costs of an item refers to all those things that must be forgone to acquire that item. Opportunity costs include explicit costs and implicit costs.

Marginal Product of labor:

Shows how much the output (change in Q) increases as we hire one additional worker (change in L), holding all other inputs constant

Total Revenue (definition)

The amount a firm receives from the sale of its output

Total Revenue is

The amount of money that a firm receives from the sale of its output

Average Product:

The labor shows how much of the output (Q) is produced per worker (L), holding all other inputs constant (K)

Diminishing Marginal Product

The marginal product of an input declines as the quantity of the input increases (other things equal)]

Economic Profit (EP) =

Total Revenue - (explicit + implicit costs) Economic profit will never exceed accounting profit

T/F: Assuming that implicit costs are positive, accounting profit is greater than economic profit.

True

total revenue minus total explicit costs is the

accounting profit

marginal cost =

change total cost / change ini quantity

total revenue minus total cost, including explicit and implicit costs

economic profit

the input costs that require an outlay of money by the firm are..

explicit costs

Average fixed cost =

fixed cost / quantity of output

the input costs that do not require an outlay of money by the firm are

implicit costs

Shantelle used to manage a coffee shop, earning $30,000 per year. She gave up that job to start a workout facility. In calculating the economic profit of her workout facility, the $30,000 income that she gave up is counted as part of the workout facility's

implicit costs. (foregone in come is an implicit costs. implicit costs are included in economic costs but not accounting costs)

output equals what?

labor + capital =

Which of the following is not an example of an opportunity cost that is also an implicit cost? 1) forgone labor earnings for an entrepreneur 2) forgone interest payments when the money is invested in one's business 3) Lease payments for the building in which the firm operates 4) the value of the business owner's time

lease payments for the building in which the firm operates (Forgone interest payments, value of business owner's time, and forgone labor earnings do not require an outlay of money and therefore are implicit costs. Lease payments require an outlay of money and therefore are an explicit cost.)

Economists normally assume that the goal of the firm is to

maximize profit

Explicit Costs

require an outlay of money (I.e. paying wages to workers)

Production Function:

shows the relationship between the quantity of input (labor) used to product a good and the quantity of output (product) of that good

Mitch opened a new shop that sells golf equipment and private lessons. If Mitch is a typical firm owner, he will make decisions that will result in

the greatest level of profit, even if that means higher costs.

Total Cost

the market value of the inputs a firm uses in production

industrial organization

the study of how firms decisions about prices and quantites depend on the market condition they face

the the market value for the inputs a firm uses in production is the

total cost

average cost =

total cost / quantity

average total cost =

total cost/ quantity of output

The amount a firm receives for the sale of its output is the

total revenue

profit =

total revenue - total cost


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