ECO2023 - Module 8 Quiz

True or False: There are many ways to avoid fixed costs in the short run.

FALSE. There are *no* ways to avoid fixed costs in the short run

True or False: Total output may continue to rise though marginal physical product is increasing.

FALSE: Total output may continue to rise if marginal physical product is *decreasing*

True or False: The productivity of any input is independent and is not affected by the other resources that are used.

False

What is the best explanation of why the law of diminishing returns does not apply in the long run?

In the long run, firms can increase the availability of space and equipment to keep up with the increase in variable inputs.

What is implicit cost?

the cost of inputs where there is no direct payment; it is is measured by the value, in dollar terms, of the benefits that are forgone (ex. forgone salary of the owner, forgone investment income, forgone rent, etc.)

The lowest cost possible when output is zero is equal to...

the fixed costs

What is the total cost?

the market value of all the resources used to produce a good or service

What does the bottom of the "U" of a ATC curve represent?

the minimum cost output, or the *lowest possible opportunity costs* to produce the product

What are dollar costs?

the most likely basis of production decision

What is the implicit cost of capital?

the opportunity cost of capital (ie what the owner could've earned in the next best alternative)

What is the definition of production?

the process of transforming inputs (factors of production) into outputs

What does the long-run average total cost show?

the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

What is the economic profit?

the total revenue minus both the explicit and implicit costs (with an allowance for depreciation)

What is the accounting profit?

the total revenue minus the *explicit* costs (with an allowance for depreciation)

What is the purpose of a production function?

to tell us just how much output we can produce with varying amounts of inputs

The law of diminishing marginal product of labor is demonstrated by...

total output increases at a decreasing rate as you increase the quantity of labor

The short run:

typically refers to the period of time in which the firm has sufficient time to change the amounts of only some of its inputs.

The dollar costs are directly related to the ______________.

underlying production function

What are the two types of inputs?

variable and fixed inputs

How fast total costs rise depends on ________ only

variable costs (since fixed costs don't change)

What are the economies of scale?

where long-run average total cost *falls* as the quantity of output increases

What are the diseconomies of scale?

where long-run average total cost *rises* as the quantity of output increases

What is the constant returns to scale?

where long-run average total cost *stays the same* as the quantity of output increases.

Which of the following must always be downward-sloping?

The average total cost curve when it is above the marginal cost curve.

Marginal product is:

The change in total output divided by the change in input quantity.

What is the Law of Diminishing Product?

The marginal product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs...example: as more labor is hired, each unit of labor has less capital and less land to work with

What are fixed costs?

costs of production that do not change when the rate of output is altered...the cost related to the fixed input...for example, the cost of basic plant and equipment

If MC < ATC, ATC is...

decreasing

Occur when an increase in plant size results in reducing operating efficiency.

diseconomies of scale

The long-run average cost curve will be upward sloping when the firm is experiencing:

diseconomies of scale

A firm experiencing economies of scale will have a long-run average cost curve that is:

downward sloping

Reductions in minimum average costs that come about through increases in the size (scale) of plant and equipment

economies of scale

The average fixed cost (AFC) curve is:

falling as output expands

How can diminishing marginal product be seen?

from the fact that the slope falls as the amount of labor used increases

What does the total product curve show?

how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

ATC declines as output...

increases

If MC > ATC, ATC is...

increasing

How do you find Average fixed cost (AFC)?

it is the fixed cost divided by the amount of output produced

How do you find Average variable cost (AVC)?

it is the variable cost divided by the amount of output produced

How do you find Average total cost (ATC)?

it is total cost divided by the amount of output produced (also known as *average cost*)

The type of time period that all inputs can be changed...

long-run

The best indication of economies of scale is when the firm's:

long-run average total cost curve is downward sloping.

The marginal cost curve always intersects the ATC curve at its __________ point

lowest

The long run:

means all inputs are variable

If the owner's implicit costs are greater than the accounting profit of the firm, the economic profit will be....

negative

The slope of the ______ measures marginal product

production function

What are factors of production?

resource inputs used to produce goods and services, such as land, labor, capital, and entrepreneurship

As the rate of output increases, AVC will eventually...

rise

The type of time period that most inputs cannot be changed...

short-run

In the short run:

some costs are variable, and some costs are fixed

As the rate of output increases, AFC decreases as the fixed cost is....

spread over more output ("spreading effect")

What is marginal cost?

the change in total costs associated with *one* more unit of output

What is the Marginal Product (MP)?

the change in total output that results from employment of *one* additional unit of input

How is total cost found?

by adding together the fixed costs and the variable costs

What are variable costs?

costs of production that change when the rate of output is altered...the cost of the variable inputs...for example, the cost of labor and material costs

What does a firm's cost of production include?

all the opportunity costs of making its output of goods and services

What is a fixed input?

an input who quantity can not be changed in the given time period (usually capital, powerplant size, etc)

What is a variable input?

an input whose quantity can be changed (usually labor, material, etc.)

The average total-cost (ATC) curve is what shape?

A U-Shape

Why does ATC start rising?

Because AVC rises substantially

Why is ATC high at very low levels of output?

Because fixed cost is only spread over a few units

Why does AVC rise?

Because of diminishing returns in the production process

What is generally less, account or economic profit?

Economic profit is generally smaller

A firm is producing 100 units of output at a total cost of $800. The firm's average variable cost is $5 per unit. The firm's:

average fixed cost is $3

What is the variable input that determines how much output we get from our fixed inputs (land and capital)?

Labor

What are labor and capital like in the *short-run*?

Labor can change while capital is held constant

A production function shows the:

Maximum output we can produce with varying combinations of factor inputs.

True or False: Long-runs don't have fixed costs.

TRUE

Curve showing how total output changes are more of a variable input is employed

Total product curve

True or False: Marginal cost and marginal product are inversely related.

True

True or False: Whenever marginal product is increasing with output, the marginal cost of producing a good must be falling.

True

The expected shape of the long-run average total cost curve is:

U-shaped

Economic costs and economic profits are:

Usually greater and smaller, respectively, than their accounting counterparts.

What is explicit cost?

a cost that involves actually laying out [actual] money

What is a production function?

a technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs