Chapter 9- Businesses & the Costs of Production
If total variable cost is $100, total fixed cost is $100, and output is 10, what is average variable cost?
$10 AVC = TVC/output
Suppose the total fixed cost of a firm is $500, the total variable cost is $200, and the output produced is 5 units. The average fixed cost of the firm is _____________.
$100 AFC = TFC/output = 500/5
Suppose the total fixed cost of a firm is $500, the total variable cost is $200, and the output produced is 5 units. The average fixed cost of the firm is_____________.
$100 AFC = TFC/output = 500/5
What is the total revenue if the economic profit is $24,000 and the economic costs are $96,000?
$120,000 REASON: Rearrange the profit formula to solve for total revenue.
If economic cost is $96,000 and total revenue is $120,000, what is the economic profit?
$24,000 Economic profit = total revenue - economic costs
If total cost rises from $300 to $700 when one additional unit of output is produced, what is the marginal cost?
$400 Reason: Marginal cost equals change in total cost divided by change in output.
What is the average fixed cost if total fixed cost is $100, total variable cost is $50, and output is 20?
$5 AFC = TFC / output = 100 / 20
Your company's total sales revenue for the month is $150,000; the costs to produce your products are $12,000 for rent, $6,000 for utilities, and $42,000 for employee wages. What is your accounting profit?
$90,000 $150,000-$60,000 (explicit costs)= $90,000
With economies of scale, a 10% increase in all resources that causes a 20% increase in output results in which of the following?
A decline in average total cost (ATC).
Which of the following illustrates constant returns to scale?
A firm's 10% increase in given inputs, causing a proportionate 10% increase in output.
Which of the following explains the concept of explicit costs?
A firm's monetary payments made for the use of resources owned by others. A firm's monetary payments to those who supply labor services, materials, fuel, and transportation services.
ATC is:
AFC + AVC
How does minimum efficient scale factor into the number of aircraft concrete manufacturers in the United States?
Aircraft manufacturing requires large economies of scale. Concrete manufacturing requires modest economies of scale. Concrete plants have a very limited distribution range. The economies of scale for concrete manufacturing are exhausted before they grow very large.
Marginal cost includes which of the following?
All the cost associated with producing the last unit of output. The cost savings resulting from not producing the last unit of output.
What is meant by the phrase "spreading the overhead"?
As production increases, average fixed cost declines.
Which of the following is true of average fixed cost when output increases?
Average fixed cost declines as output increases.
What methods can be used to calculate average total cost?
Average fixed cost plus average variable cost Total cost divided by output (Q)
How is total cost calculated?
By adding total fixed cost and total variable cost.
How is marginal cost (MC) calculated?
By dividing the change in total cost by the change in output
What is another term for economies of scale?
Economies of mass production
The U-shape of the long-run average-total-cost curve results from which of the following?
Economies of scale Diseconomies of scale
Which of the following resources can a firm easily and quickly adjust? a) Fuel b) Hourly labor c) Raw materials d) Size of the factory e) Production-line machinery
Fuel Hourly labor Raw materials
Which of the following are examples of labor specialization?
Hiring more workers in order to subdivide tasks Assigning each worker one task instead of five or six
Why does the law of diminishing returns not account for the U-shape of the long-run average-total-cost curve?
In the long run all resources and inputs are variable.
How does labor specialization allow a worker to become more proficient?
It allows a worker to focus on fewer tasks and become more skilled in performing those tasks.
Greater labor specialization has which of the following effects?
It eliminates the loss of time that occurs whenever a worker shifts from one task to another.
Which of the following best describes the average variable cost curve?
It is U-shaped.
A firm grows from one to three plants. As a result, the firm's sales increase, leading to greater marketing expertise. This is an example of which of the following?
Learning by doing
A planning curve is another term for which of the following?
Long run average-total-cost curve
By expanding the size of its operations, a growing firm is able to experience economies of scale to do which of the following?
Lower its average total costs
Which of the following result from managerial specialization?
Lower unit costs Greater efficiency
What type of cost can be saved by not producing the last unit?
Marginal
A firm's decision whether to produce a few more or a few less units of output is a decision based on which of the following?
Marginal data
What happens to marginal product when total product is increasing but at a decreasing rate?
Marginal product is positive but falling.
Which best describes economic costs?
Payments that must be made to obtain a resource
What is the effect of an increase in the price of labor on the ATC, AVC, and MC curves?
The average-variable-cost, average-total-cost, and marginal-cost curves shift upward. The average-fixed-cost curve remains the same.
Which of the following sections of a long-run average total cost curve depicts constant returns to scale?
The flat section
What determines the degree of the shift in a firm's AVC, MC, and ATC curves when gasoline prices increase?
The level to which gasoline is a major input cost for the firm.
How do increases in gasoline prices affect AVC, MC, and ATC curves of most companies?
They all shift upward.
How do increases in gasoline prices affect the AVC, MC, and ATC curves of most companies?
They all shift upward.
What accounts for the stark contrast in the number of concrete plants and the number of aircraft manufacturing plants in the United States?
They have dramatically different minimum efficient scales.
How is average fixed cost determined?
Total fixed cost divided by output
True or false: Hourly labor, raw materials, and fuel are examples of resources a firm can easily adjust.
True Reason: A firm can quickly and easily adjust its variable inputs such as hourly labor, raw materials, and fuel.
When the marginal-cost curve lies:
above the ATC curve, ATC rises.
Average fixed cost equals total fixed cost divided by the ______.
amount of output
The vertical distance between ATC and AVC measures:
average fixed cost
Which curve starts high and then declines as output rises?
average fixed cost curve
Total fixed cost divided by output plus total variable cost divided by the output yields which of the following?
average total cost
Which curve first falls and then rises?
average variable cost curve
An increase in the price of labor has no effect on which cost curve?
average-fixed-cost
Which best describes economic costs? a) Explicit plus accounting costs b) Payments that must be made to obtain a resource c) The lowest value attributed to a resource. d) Implicit costs
b) Payments that must be made to obtain a resource
The law of _________ returns states that as successive units of a variable resource are added to a fixed resource, beyond some point, the marginal product will decline.
diminishing
The marginal cost curve's shape is a consequence of the law of __________ returns.
diminishing
The marginal cost curve's shape is a consequence of the law of _____________ returns.
diminishing
Assuming technology and production techniques are fixed and cannot change, if beyond some point of production a firm experiences declining units of additional output with each additional unit of labor input, then the firm is experiencing the effects of the law of _______________.
diminishing return
The ______ cost of any resource used to produce a good is the value or worth the resource would have in its best alternative use.
economic
________________ profit is the term used to describe profit that considers both explicit and implicit costs.
economic
Start-up firms achieve __________ of scale from learning by doing and through increased specialization of labor, management, and equipment.
economies
Start-up firms achieve ____________ of scale from learning by doing and through increased specialization of labor, management, and equipment.
economies
Learning by doing contributes to a firm's ______.
economies of scale
Accounting profit is what remains after a firm has paid its __________ costs.
explicit
__________ costs are the monetary payments a firm makes to purchase resources from others.
explicit
A firm's insurance premiums are generally considered __________ costs.
fixed
Which costs do not vary with changes in output?
fixed
How is total cost calculated?
fixed costs + variable costs
The marginal-cost curve first declines and then increases because of:
increasing, then diminishing, marginal returns.
From the industry's viewpoint, the ________ run includes enough time for existing firms to dissolve and leave the industry or for new firms to be created and enter the industry.
long
In the ______ run, firms are able to adjust all resources.
long
In the __________ run, firms are able to adjust all resources.
long
A time period during which a firm can adjust the quantities of all the resources that it employs, including plant capacity, is known as which of the following?
long run
Economies of scale explain the downward-sloping part of the __________ curve.
long-run average-total-cost
Economies of scale explain the downward-sloping part of the ___________ curve.
long-run average-total-cost
A marketing supervisor works in a small plant where she performs a range of duties. As the company grows and hires additional supervisors, she is able to spend the bulk of her time in her area of expertise. In this example, the company has increased its
managerial specialization
A firm's decision about what output level to produce is typically a ______ decision.
marginal
Which of the following costs can a firm control directly and immediately?
marginal
The lowest level of output at which a firm can minimize long-run average costs is called
minimum efficient scale
A ______ is a relatively rare market situation in which average total cost is minimized when only one firm produces the good.
natural monopoly
Average variable cost equals total variable cost divided by total ______________.
output
Variable costs change with the level of ______________.
output
A firm cannot avoid paying fixed costs in the ____________ run.
short
Increased labor ______ becomes more achievable as a plant increases in size.
specialization
What is the definition of total product (TP)?
the total quantity, or total output, of a particular good or service produced
_____________ cost is the sum of fixed cost and variable cost at each level of output.
total
What is the term for the total quantity of a specific good produced?
total product
In microeconomics, the long run is also known as which of the following?
variable-plant period