AP Micro Unit 3

normal profit is when total revenue covers:

1. out-of-pocket expenses (land, labor, and capital) 2. the entrepreneur's foregone income

3.7: Characteristics

1. price taking firms 2. lots of competitors: thousands? millions? 3. identical (standardized) products 4. free entry and exit in the long run 5. zero economic profit in the long run

3.2: ATC =

AFC + AVC

5.6: if TR < VC then

The firm's losses will be greater than fixed cost- shut it down

3.2: If the marginal cost of producing the first unit of some good is $20 and the marginal cost of producing the second unit is $30, the average variable cost of producing 2 units is a. $5 b. $10 c. $20 d. $25 e. $50

d. $25 $20 + $30 = 50 / 2 = $25

3.2: If the average variable cost of producing 5 units of a good is $100 and the average variable cost of producing 6 units is $150, then the marginal cost of increasing output from 5 to 6 units is a. $50 b. $250 c. $300 d. $400 e. $500

d. $400 5 x 100 = 500 6 x 150 = 900 (900 - 500) / (6 - 5) = $400

3.1: in microeconomics, the short run is defined as which of the following? a. A period that is less than one year b. A period that is between one year and four years c. A period that is too short for a firm to be able to change its level of output d. A period during which some inputs in a firm's production process cannot be changed e. A period during which a firm's fixed costs exceed its variable costs

d. A period during which some inputs in a firm's production process cannot be changed

3.1: The table below shows the short-run production function for picking apples. Based on the production data, which of the following statements about the marginal product of the fifth worker is true? number of workers; bushels of apples picked: 0;0 1;4 2;9 3;15 4;20 5;24 a. It is the maximum that can be attained. b. It is greater than the marginal product of the first worker due to increasing returns. c. It is greater than the combined marginal products of all the other workers. d. It is less than the marginal product of the third worker due to diminishing returns. e. It is rising due to increasing marginal returns.

d. It is less than the marginal product of the third worker due to diminishing returns.

3.4: when a firm ears just enough revenue to pay for both explicit and implicit costs, they are said to be earning a ________

normal profit

3.6: Barriers to entry

obstacles that prevent new competitors from entering a market

3.3: increasing returns to scale

output is increasing at a faster rate than all inputs

3.3: decreasing returns to scale

output is increasing at a slower rate than all inputs

3.3: Constant returns to scale

output is increasing at the same rate as all inputs

3.4: Accounting and Economic profit: Total Revenue =

price x quantity

3.2: marginal cost

the additional cost of the producing one more unit of output MC = change TC / change Q

3.1: marginal product

the additional output produced by one unit of a variable input, often labor MPL= change TP/change L

3.2: average fixed cost

the average per-unit fixed cost of production for a given quantity of output AFC = FC / Q

3.2: average total cost

the average per-unit total cost of production for a given quantity of output ATC = TC / Q

3.2: average variable cost

the average per-unit variable cost of production for a given quantity of output AVC = VC / Q

3.1: average product

the average quantity of output produced by one unit of a variable input, often labor APL=TP/L

if MR < MC, then

the firm should produce less output

if MR > MC, then

the firm should produce more output

3.1: short run

the period of time during which there are fixed inputs; the period of time too short for a firm to alter its plant capacity only variable inputs can be altered some inputs are fixed plant capacity is fixed there are both fixed and variable costs

3.1: long run

the period of time long enough for a firm to change all of its inputs; the period of time long enough for a firm to alter its plant capacity all inputs can be altered no inputs are fixed plant capacity can be altered all costs are variable

3.2: total cost

the sum of fixed and variable costs

3.1: total product

the total quantity of the output produced by a certain amount of inputs

3.1: production function

the way a firm combines inputs to produce an output

3.1: two types of inputs

variable and fixed

3.6: loss but stay open

when MR = MC < AVC

3.6: shut down temporarily

when MR = MC < AVC

3.6: profit or breaking even

when MR = MC > or = ATC

3.6: A competitive market with no barriers to entry is operating in the the long run. All firms are currently earning Zero Economic Profit. Now assume that the demand for the good sold in that market increases. What will happen in the long run? a. The market supply will decrease, but the quantity supplied will increase. b. New firms will enter the market. c. Firms will price greater than their average revenue. d. Firms will continue to produce the same quantity of output. e. Firms will exit the market.

b. New firms will enter the market.

3.5: Assume a competitive firm is experiencing the following costs at a quantity of 10 and at a price of $8. What should the firm do in order to maximize profits? MR= $8 MC= $4 TR= $80 TC= $60  a. The firm should produce less than a quantity of 10 in order to maximize profit. b. The firm should produce a quantity of 10 as it is currently earning an economic profit. c. The firm should produce more than a quantity of 10 in order to maximize its profit. d. The firm should reduce its price so that MR= MC. e. The firm should increase its price so that MR=MC

c. The firm should produce more than a quantity of 10 in order to maximize its profit.

3.4: Implicit costs

"income forgone"; the money value of one's opportunity cost ex. Teacher opens a restaurant: the income. They are giving up by becoming a restaurant owner

3.4: Explicit costs

"out-of-pocket expenses"; money spent on materials, utilities, labor, rent, capital, etc.; ex. A car company faces, explicit costs, such as metal, copper, rubber, leather, computer, software, and auto works

3.6: marginal and average =

"per-unit" measurements

3.3: Constant returns to scale (efficient scale)

Long-run ATC is constant as output increases

3.4: Economic Profit: Total cost =

Explicit costs + implicit costs

3.4: Accounting profit: Total cost =

Fixed costs + variable costs

3.3: minimum efficient scale

Helps determine the number of firms in a market

5.6: Shutting down temporarily

In the short run is a rational action that firms should consider taking

3.3: Economies of scale

Long-run ATC decreases as output increases

3.3: diseconomies of scale

Long-run ATC increases as output increases

3.5: Profit Maximization Rule

MR = MC Marginal Revenue = Marginal Cost

3.6: Shut down rule:

TR < VC total revenue < Variable cost Total revenue must cover its variable costs to continue to operate

3.7: equations

TR = P x Q AP = TR / Q -- AP = P MR = change of TR / change of Q MR = P = AR = D (MR PAR-D) ATC x Q = Total cost (P-ATC) Q = Profit

3.5: marginal revenue

change in total revenue / change in quantity

3.4: Accounting profit =

Total revenue - explicit costs

3.4: Economic profit =

Total revenue - explicit costs and implicit costs

3.2: variable cost

a cost that changes as output changes

3.2: fixed cost

a cost that must be payed even when a firm's output is zero; a cost that is the same at all output levels

3.1: plant capacity

a firm's maximum potential level of production

3.2: Consider the following cost information for a small farm that grows apples. Quantity;Total Cost 0;40 1;65 2;85 3;100 4;120 5;150 6;190 a. What is the farm's fixed cost? b. What is the marginal cost of growing the second bushel? c. What is the farm's variable cost when it is growing three bushels? d. What is the farm's average total cost when it is growing four bushels? e. What is the farm's average fixed cost when it is growing five bushels? f. What is the farm's average variable cost when it is growing six bushels?

a. $40 b. (85 - 65) / 1 = $20 c. 100 - 40 = $60 d. 120 / 4 = $30 e. 40 / 5 = $8 f. (190 - 4-) / 6 = $25

3.1: When marginal product exceeds average product, which of the following must be true? a. Average product is increasing. b. Average product is decreasing. c. Marginal product is increasing. d. Total product is decreasing. e. Total product is at its maximum.

a. Average product is increasing.

3.2: Which of the following best describes the relationship between the average total cost curve and the marginal cost curve in the short run? a. If the average total cost curve is rising, the marginal cost curve is above the average total cost curve. b. If the average total cost curve is rising, the marginal cost curve is below the average total cost curve. c. If the average total cost curve is above the marginal cost curve, the marginal cost curve is rising. d. If the average total cost curve is below the marginal cost curve, the marginal cost curve is falling. e. If the average and marginal cost curves intersect, the marginal cost curve is at a minimum.

a. If the average total cost curve is rising, the marginal cost curve is above the average total cost curve.

3.3: The table below shows the various units of output that can be produced with different combinations of capital and labor. Which of the following statements is correct according to the information in the table? Units of output (units of labor going downward) 1 2 3 1 100; 140; 160 2 140; 200; 240 3 160; 240; 300 a. In the long run, there are constant returns to scale. b. In the long run, there are increasing returns to scale. c. In the short run, the marginal product of capital is constant. d. In the short run, the marginal product of labor is constant. e. In the short run, the law of diminishing marginal returns does not hold.

a. In the long run, there are constant returns to scale.

3.5: Assume a competitive firm is producing where its. Price (P) and marginal revenue (MR) are greater than its marginal cost (MC). Which of the following is true regarding the firm's short-run output level? a. The firm is producing too little and should increase its output level until P=MR=MC. b. The firm is producing too much and should reduce its output level until P=MR=MC. c. The firm is not maximizing profits and should raise its price but not its output level. d. The firm should increase its marginal revenue and reduce its output level until MR= MC. e. The firm should reduce its price until P=MR=MC.

a. The firm is producing too little and should increase its output level until P=MR=MC.

3.3: F&D Manufacturing Company increases all its inputs by 50 percent each. If F&D's output increases by 100 percent, then F&D is experiencing a. increasing returns to scale b. constant returns to scale c. diseconomies of scale d. increasing marginal cost e. decreasing profits

a. increasing returns to scale

3.5: Maximizing profit

as long as the revenue from an additional product is greater than or equal to the cost of an additional product, the firm should keep producing

3.2: The table below shows a firm's total cost of producing various units of output. What is the average variable cost of producing three units? Quantity;total cost 0;30 1;40 2;47 3;51 4;59 a. $4 b. $7 c. $10 d. $17 e. Cannot be determined from the given information

b. $7 51 - 30 = 21 / 3 = $7

3.3: Which of the following MUST be true of the long run? a. It is at least one year in duration. b. All factors of production are variable. c. At least one factor of production is fixed. d. Marginal costs are constant. e. Average total costs are constant.

b. All factors of production are variable.

3.2: Which of the following best explains why the short-run average total cost curve is U-shaped? a. Spreading total fixed costs over a larger output, and constant returns b. Spreading total fixed costs over a larger output, and eventually diminishing returns c. Increasing total fixed costs and increasing returns d. Increasing average variable costs and decreasing returns e. Decreasing average variable costs and increasing returns

b. Spreading total fixed costs over a larger output, and eventually diminishing returns

3.6: A competitive firm is producing where MR=MC. It also faces the following cost and revenue data. What should it do to in the short run? Quantity: 10 Price: $5 Average Fixed Cost: $4 Average Variable Costs: $4 Average Total Cost: $8 a. Stay open and continue earning a profit b. Stay open to minimize losses c. Shut down temporarily to minimize losses. d. Exit the market to minimize losses. e. Increase price to increase its revenue.

b. Stay open to minimize losses passes shut down rule: 50>40 5 x 10 = $5 TR 4 x 10 = $40 FC 4 x 10 = $40 VC 8 x 10 = $80 TC TR - TC = -$30 (they would pay 40 to shut down, so save 10)

3.2: Beyond a certain level of output, the short-run marginal cost will rise because a. there is no fixed input and costs will increase b. at least one input is fixed and eventually diminishing returns will occur c. the cost of the variable input increases when marginal product increases d. the demand for the good decreases when production is limited e. input prices increase when production increases and consumption is limited

b. at least one input is fixed and eventually diminishing returns will occur

3.3: If a firm's long-run average total cost increases as output increases, the firm is experiencing a. economies of scale b. diseconomies of scale c. increasing returns to scale d. efficiency in plant size e. maximum economic profit

b. diseconomies of scale

3.1: Suppose that a firm begins to hire workers for a newly completed plant with a fixed amount of machinery. As the firm hires additional workers, one would expect the marginal product to a. fall initially, but eventually rise b. rise initially, but eventually fall c. rise consistently due to diminishing return d. rise consistently due to the advantages of specialization e. rise consistently due to economies of scale

b. rise initially, but eventually fall

3.2: The table below shows the amount of labor inputs necessary to produce given levels of output. If the cost of a unit of labor is $20 and total fixed cost is $100, the average total cost of producing 20 units of output is Units of labor input; units of output: 1;8 2;20 3;30 a. $1 b. $2 c. $7 d. $40 e. $120

c. $7 $20 x 2 = 40 + $100 = 140 / 20 = $7

3.2: As output of a firm increases, the difference between the firm's average total cost and its average variable cost gets smaller because the firm's a. total cost is increasing b. marginal cost is increasing c. average fixed cost is decreasing d. marginal product of labor is decreasing e. long-run average total cost is decreasing

c. average fixed cost is decreasing

3.1: When total physical product is at its maximum, marginal physical product must be Assignments a. greater than one b. equal to one c. equal to zero d. less than zero e. constant

c. equal to zero

3.5: marginal cost

change in total cost / change in quantity

3.5: At the current quantity that the firm is selling, the firm has Marginal Cost of $200 while Marginal Revenue is $175. Which of the following is true? a. The firm earns a negative economic profit. b. The firm earns positive economic profit. c. The firm's profits would increase if the firm increased quantity sold. d. The firm's profits would increase if the firm decreased the quantity sold. e. The firm is breaking-even.

d. The firm's profits would increase if the firm decreased the quantity sold.

3.5: At its current quantity, a firm finds that in order to increase potential profit, it must decrease its production. If P = price, MR = Marginal Revenue and MC = Marginal Cost, which of the following reflects the firm's current situation? a. P=MR>MC b. P=MR=MC c. MR=MC d. MR>MC e. MR<MC

e. MR<MC

3.1: variable inputs

inputs that can be changed in the short run to change production

3.1: fixed inputs

inputs that cannot be changed in the short run to change production

3.2: what does marginal cost do on a graph?

it decreases first, then increases

3.2: what does average fixed cost do on a graph?

it is always decreasing, meaning average variable cost and average total cost get closer together

3.2: what does average total cost do on a graph?

it makes a U shape

3.2: what does average variable cost do on a graph?

it makes a U shape