Micro-Chapter 9
What is the total revenue if the economic profit is $24,000 and the economic costs are $96,000?
$120,000
What is the total revenue if the economic profit is $24,000 and the economic costs are $96,000?
$120,000 $96,000 + $24,000 = 120,000
When output is 10, what is the total cost if total fixed cost is $50 and total variable cost is $75?
$125
If at 10 units of output, total fixed cost is $10 and total variable cost is $16, what is total cost?
$16
What is the average fixed cost if total fixed cost is $100, total variable cost is $50, and output is 20?
$5
A company has three workers. It adds an additional laborer and its total product increases by 21. What is the company's marginal product?
21 MP = change in total product/change in labro 21/1 = 21
If total product is 50 and the units of labor used is 10, then the average product is
5 AP= Total product/labor 50/10 = 5
What is the average product If total product is 30 and there are 3 units of labor?
10 AP = total product/units of labor 30/3 = 10
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.
Economic Profit Forumla
Economic Profit = Revenue - Implicit Costs - Explicit Costs By subtracting all your economic costs from your revenue, you determine how your current business venture compares with your best alternative business venture
What happens to average product as additional units of labor are added to a fixed plant?
It increases, reaches a maximum, and then decreases.
Which of the following best describes the average variable cost curve?
It is U-shaped.
Which of the following is true regarding a firm's plant capacity?
It is fixed in the short run
Which of the following are types of resources that require more time for a firm to adjust, given a change in demand?
Size of the factory Amount of machinery
A(n) ______ profit is equal to total revenue less explicit costs.
accounting
Generally speaking, there are two types of calculable profits. Of these, _____ profit is what remains after a firm has paid its explicit costs.
accounting
_____ profit is the firm's total revenue less its explicit costs, whereas _____ profit is the firm's total revenue less economic costs
accounting; economic
Average fixed cost equals total fixed cost divided by the ______.
amount of output
What happens to average product when marginal product exceeds it?
average product continues to rise
Which of the following is true where the marginal product curve intersects the average product curve?
average product is at its maximum
Marginal Cost Formula
change in total cost / change in quantity
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
Total ______ costs equal explicit costs plus implicit costs.
economic
A firm's insurance premiums are generally considered _____ costs.
fixed
Which costs do not vary with changes in output?
fixed
______ costs are part of the simple existence of a firm's plant and must be paid even when output is zero.
fixed
In the short run, a business manager is unable to alter which of the following?
fixed costs
Forgone entrepreneurial income is an example of a(n) ______.
implicit cost
implict costs
input costs that do not require an outlay of money by the firm
Long-Run Variable Plant
is a period long enough for a firm to adjust the quantities of all the resources that it employs, including plant capacity From the industry's viewpoint, the long run also includes enough time for existing firms to leave the industry or for new firms to enter the industry. In microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ, so that all resources and costs are variable and no resources or costs are fixed.
Which is another term for average product?
labor productivity
______ product is the change in total product divided by the change in labor input.
marginal
Average product declines when ______.
marginal product is less than average product
What happens to marginal product when total product is increasing but at a decreasing rate?
marginal product is positive but falling
What happens to marginal product when total product is increasing at an increasing rate?
marginal product is rising
Average variable cost equals total variable cost divided by total ______.
output
The size of the factory, the amount of machinery and equipment, and other capital resources define _______ _____ . (Enter one word in each blank.)
plant capacity
Which resource requires the most time for a firm to adjust, given a change in demand?
plant capacity
Accounting Profit
the profit number that accountants calculate by subtracting total explicit costs from total sales revenue.
_____ cost is the sum of fixed cost and variable cost at each level of output.
total
When viewed on a graph, total variable cost is measured ______ at each level of output from the X axis.
vertically
If the change in total product is 10 units and the change in labor input is 1, what is marginal product?
10 MP = change in total product/change in labor 10/1 = 10
Average Product (AP)
Also called labor productivity, is output per unit of labor input Average Product = total product/units of labor The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource).
______ costs are the monetary payments a firm makes to purchase resources from others.
explicit
Later in a production cycle, as diminishing returns are encountered, variable costs ______ for each additional unit of output.
increase by increasing amounts
When total product declines, marginal product ______.
is negative
Marginal Profit (MP)
is the EXTRA output or added product associated with adding a unit of a variable resource. Marginal Product = change in total product/change in labor input The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.
If economic cost is $96,000 and total revenue is $120,000, what is the economic profit?
$24,000
What is the term for the total quantity of a specific good produced?
Total Product
True or false: The short run and the long run are conceptual periods rather than calendar time periods.
True
Which of the following explain the concept of explicit costs?
A firm's monetary payments to those who supply labor services, materials, fuel, and transportation services. A firm's monetary payments made for the use of resources owned by others.
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 ______.
AFC = TFC/Output $500/5 = $100
What is the average fixed cost if the average total cost is $100 and the average variable cost is $75?
ATC = AFC-AVC ATC = $100-$75 = $25
If total variable cost is $100, total fixed cost is $100, and output is 10, what is average variable cost?
AVC = TVC/Output (Q) AVC = $100/10 = $10
Average Variable Cost Formula
AVC = TVC/Q = Total Variable Costs/Output
What is the difference between accounting profit and economic profit?
Accounting profit equals total revenue less explicit costs. Economic profit equals total revenue less economic costs (explicit and implicit).
When a firm considers its economic costs, it considers which of the following?
All opportunity costs of resources used Explicit and implicit costs
Why does marginal product eventually diminish as units of labor are added?
Because the number of workers increases relative to the amount of capital equipment
Which of the following illustrate the concept of a short-run adjustment?
Boeing adds an entire shift of workers. Boeing hires 100 extra workers for one of its commercial airline plants.
Which of the following are long-run adjustments?
Boeing installs more robotic welding equipment. Boeing adds a new production facility.
Fixed Costs
Costs that do not vary with the quantity of output produced Any cost that in total does not change when the firm changes its output
True or false: Economic costs equal explicit costs minus implicit costs.
False
Which of the following resources can a firm easily and quickly adjust?
Fuel Raw materials Hourly labor
What type of opportunity cost does a firm incur when it uses resources that it already possesses instead of selling them for cash?
Implicit
In the short run, if a firm wants to vary its output, what resources can it adjust?
Labor Materials
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
Which group of costs is the most accurate example of variable cost?
Payments for materials, fuel, power, and transportation services
Which best describes economic costs?
Payments that must be made to obtain a resource
Total Cost Formula
TC = TFC + TVC Total Cost = Total Fixed Cost + Total Variable Cost
What does it mean to the entrepreneur when economic profit is zero?
The entrepreneur is covering all explicit and implicit costs, including a normal profit.
How is marginal product (MP) defined?
The extra output or added product associated with adding a unit of a variable resource
Which best describes average product (AP)?
The output per unit of labor input
Which of the following are examples of a long-run adjustment period?
The three years it takes an oil refining company to build a new plant The two days it takes a t-shirt maker to add sewing machines and silk-screen printers
Economic Costs
The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship. explicit costs + implicit costs
What is the definition of total product (TP)?
The total quantity, or total output, of a particular good or service produced
What happens to variable costs during the onset of production when marginal product is increasing?
They decrease with successive units of output.
Law of Diminishing Returns
This law assumes that technology is fixed and thus that production techniques do not change The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.
How is average fixed cost determined?
Total fixed cost divided by output
What is the definition of economic profit?
Total revenue minus economic costs (explicit and implicit)
Which of the following sets of values are necessary to compute average total cost (ATC)?
Total variable cost, total fixed cost, and output Total cost and output Average fixed cost and average variable cost
Which of the following are examples of variable costs?
Transportation services payments Fuel costs Materials costs
True or false: Hourly labor, raw materials, and fuel are examples of resources a firm can easily adjust.
True
True or false: Implicit costs are the firm's opportunity costs of using its self-owned, self-employed resources.
True
Which of the following would incur an explicit cost?
Utility usage Labor services Raw materials
Economic Profit
accounts for all economic costs-BOTH implicit and explicit The return flowing to those who provide the economy with the economic resource of entrepreneurial ability; the total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called "pure profit" and "above-normal profit."
The law of diminishing returns assumes that ______.
all units of labor input are of equal quality
Normal Profit or typical ("noraml")
amount of accounting profit that you likely would have earned in other ventures The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income that entrepreneurial ability must receive to induce entrepreneurs to provide their entrepreneurial ability to a firm; the level of accounting profit at which a firm generates an economic profit of zero after paying for entrepreneurial ability.
Marginal Product Formula
change in total product/change in labor input
Variable Costs
change with the level of output A cost that increases when the firm increases its output and decreases when the firm reduces its output.
In a manufacturing plant with no labor, adding labor increases output and marginal product. However, at some point increasing labor will no longer increase output at the same rate. Adding even more labor eventually causes marginal product to decline, because there will simply not be enough space for so many workers to work. This is an example 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 returns
Average total cost (ATC) for any output level Q is found by:
dividing total cost (TC) by that output (Q). adding average fixed cost (AFC) and average variable cost (AVC) at that output.
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
Subtracting explicit and implicit costs from total revenue yields which of the following?
economic profit
Subtracting implicit costs from accounting profit yields which of the following?
economic profit
Accounting profit is what remains after a firm has paid its _______ costs.
explicit
A firm's monetary payments to those who supply transportation services is an example of ______.
explicit costs
Economic Cost formula
explicit costs + implicit costs
Average Total Cost (ATC)
for any output level Q is found by dividing total cost (TC) by that output (Q) or by adding AFC and AVC at that output A firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost. ATC = TC/Q = TFC/Q + TVC/Q = AFC + AVC
Average Variable Cost (AVC)
for any output level is calculated by dividing total variable cost (TVC) by that amount of output (Q) A firm's total variable cost divided by output (the quantity of product produced). Total Variable Costs/Quantity of Output
Average Fixed Cost (AFC)
for any output level is found by dividing total fixed cost (TFC) by that amount of output (Q) A firm's total fixed cost divided by output (the quantity of product produced). Total Fixed Costs/Quantity of Output
Short Run-Fixed Plant
is a period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the plant's current capacity is used. the plant capacity is fixed in the short run is a period long enough for a firm to adjust the quantities of all the resources that it employs, including plant capacity In microeconomics, a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable.
Marginal Cost (MC)
is the extra, or additional, cost of producing one more unit of output The extra (additional) cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output). MC = Change in TC/Change in Q
Total Production (TP)
is the total quantity, or total output, of a particular good or service produced The total output of a particular good or service produced by a firm (or a group of firms or the entire economy).
Variable costs change with the level of _____.
output
A firm cannot avoid paying fixed costs in the _____ run.
short
Total Costs
the sum of the fixed and variable costs for any given level of production The sum of fixed cost and variable cost. TC = TFC + TVC
At the point on a graph where total product (Q) is zero, total cost is equal to ______.
total fixed cost
Marginal Product is the slope of the _______ curve
total product
Marginal product is the slope of the ______ curve.
total product
Accounting Profit Formula
total revenue - explicit costs
What is average variable cost if total variable cost is $500, total fixed cost is $100, and output is 50?
total variable cost divided by output $500/50 = $10
Which of the following enables firms to make per-unit comparisons with product price?
Average-cost data
How is total cost calculated?
By adding total fixed cost and total variable cost
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 - $12,000 - $6,000 - $42,000 = $90,000
Which of the following statements explain why the average variable cost curve is U-shaped?
At low levels of output, production is relatively inefficient and costly. As output rises from the initial very low levels, greater specialization occurs, and average variable cost declines.
How can a business manager control variable costs in the short run?
By altering levels of production
A firm's ______ costs are the explicit and implicit costs of the resources it has used.
economic
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
Average Fixed Cost Formula
total fixed cost / quantity of output
Which of the following are examples of fixed costs?
Rental payments Interest on a firm's debts
What is the definition of average variable cost?
Total variable cost divided by output (Q)
When total revenue earned by an entrepreneur is equal to the sum of explicit and implicit costs, then the entrepreneur earns a(n) ______.
ZERO economic profit
Total product goes through three phases: It _____ initially at an increasing rate; then it increases but at a diminishing rate; finally, after reaching a maximum, _____ it .
rises; declines
Which best characterizes variable costs?
Costs that change with the level of output
Determining normal profit involves estimating which of the following?
Forgone entrepreneurial income
Which of the following are examples of implicit costs?
Forgone rent Forgone wages
What are the components of plant capacity?
Size of the factory building Amount of machinery and equipment
What happens to fixed costs when the level of production output reaches zero?
They remain unchanged.
When total product is at its maximum, marginal product is ______.
ZERO
Sunk Cost Fallacy
a framing effect in which people make decisions about a current situation based on what they have previously invested in the situation It is a deep-seated human tendency to drag past costs—so-called sunk costs—into marginal-benefit versus marginal-cost calculations.
explicit costs
are the monetary payments it makes to purchase resources from others. Because these costs involve an obvious cash transaction,
Per-unit costs are also referred to as ______ costs.
average
A farmer cultivates a cornfield by fertilizing and increases the farm's yield to 50 bushels per acre. Additional cultivation increases the yield but at a decreasing rate. At some point, additional cultivation will not lead to any additional output per acre. This is an example of the law of ______.
diminishing returns
Which curve first falls and then rises?
average variable cost curve