Micro Econ Ch 13

Average Fixed Cost

Fixed cost divided by the quantity of output (FC/Q)

Fixed Costs

Costs that do not vary with the quantity of output produced EX: fixed costs include any rent he pays because this cost is the same regardless of how much coffee he produces.

Many decisions are

fixed in the short run but variable in the long run

Which of the following is a variable cost in the short run? a. rent on the factory b. wages paid to factory labour c. interest payments on borrowed financial capital d. payment on the lease for factory equipment e. salaries paid to upper management.

wages paid to factory labor.

Whenever marginal cost is greater than average total cost,

average total cost is rising. EX: Average total cost is like your cumulative grade point average. Marginal cost is like the grade in the next course you will take. If your grade in your next course is higher than your grade point average, your grade point average will rise.

If marginal costs equal average total costs,

average total costs are minimized.

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will a. be flat (horizontal). b. slope upward. c. slope downward. d. be U-shaped.

be U-shaped.

Overview

Explicit costs Costs that require an outlay of money by the firm Implicit costs Costs that do not require an outlay of money by the firm Fixed costs Costs that do not vary with the quantity of output produced FC Variable costs Costs that vary with the quantity of output produced VC Total cost The market value of all the inputs that a firm uses in production TC= FC+ VC Average fixed cost Fixed cost divided by the quantity of output AFC= FC/Q Average variable cost Variable cost divided by the quantity of output AVC= VC/Q Average total cost Total cost divided by the quantity of output ATC= TC/Q Marginal cost The increase in total cost that arises from an extra unit of production MC= Δ TC/Δ Q

When marginal costs are below average total costs, a. average fixed costs are rising. b. average total costs are falling. c. average total costs are rising. d. average total costs are minimized.

average total costs are falling.

Average Total Cost

Total cost divided by the quantity of output (TC/Q)

Implicit Costs

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

Profit

Total revenue minus total cost (P=TR-TC)

Accounting Profit

Total revenue minus total explicit cost (TR-EC) - Accounting profit is usually larger than economic profit.

If a production function exhibits diminishing marginal product, its slope a. is linear (a straight line). b. becomes steeper as the quantity of the input increases. c. could be any of these answers. d. becomes flatter as the quantity of the input increases.

becomes flatter as the quantity of the input increases.

In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience a. an increase in average total costs. b. diseconomies of scale. c. economies of scale. d. constant returns to scale.

economies of scale.

Total Revenue

-The amount a firm receives for the sale of its output -Equals the quantity of output the firm produces times the price at which it sells its output (PxQ=TR) EX: Caroline produces 10,000 cookies and sells them at $2 a cookie, her total revenue is $20,000.

Economic profit is equal to total revenue minus a. variable costs. b. implicit costs. c. explicit costs. d. marginal costs.

the sum of implicit and explicit costs.

The marginal-cost curve crosses the average-total-cost curve at its minimum. Why?

This point of intersection is the minimum of average total cost.

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs (TR-TC(EC-IC)) - For a business to be profitable from an economist's standpoint, total revenue must cover all the opportunity costs, both explicit and implicit. - A firm making positive economic profit will stay in business. - When a firm is making economic losses (that is, when economic profits are negative), the business owners are failing to earn enough revenue to cover all the costs of production.

Average Variable Cost

Variable cost divided by the quantity of output (VC/Q)

Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings and €50,000 borrowed at 10 per cent. (Assume that she could have loaned her money out at 10 per cent, too.) Nicole can work at a competing pottery factory for €40,000 per year. The accounting profit at Nicole's pottery factory is a.€30,000. b.€35,000. c.€75,000. d.€70,000. e.€80,000.

$75,000.

Which of the following statements is true? a. All costs are fixed in the short run. b. All costs are variable in the long run. c. All costs are variable in the short run. d. All costs are fixed in the long run.

All costs are variable in the long run.

Diseconomies of Scale

The property whereby long-run average total cost rises as the quantity of output increases EX: Diseconomies of scale can arise because of coordination problems that are inherent in any large organization. The more cars Ford produces, the more stretched the management team becomes, and the less effective the managers become at keeping costs down.

Constant Returns to Scale

The property whereby long-run average total cost stays the same as the quantity of output changes

If there are implicit costs of production, a. accounting profit will exceed economic profit. b. economic profit will always be zero. c. economic profit will exceed accounting profit. d. accounting profit will always be zero. e. economic profit and accounting profit will be equal.

accounting profit will exceed economic profit.

Accounting profit is equal to total revenue minus a. implicit costs. b. variable costs. c. the sum of implicit and explicit costs. d. explicit costs. e. marginal costs.

explicit costs.

Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings and €50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Nicole can work at a competing pottery factory for €40,000 per year. The economic profit at Nicole's pottery factory is a.€80,000. b.€30,000. c.€75,000. d.€70,000. e.€35,000.

$30,000.

The cost curves shown here share the three properties that are most important to remember:

- Marginal cost eventually rises with the quantity of output. - The average-total-cost curve is U-shaped. - The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

Variable Costs

Costs that vary with the quantity of output produced EX: variable costs include the cost of coffee beans, milk, sugar, and paper cups... the salaries of these workers are variable costs.

Explicit Costs

Input costs that require an outlay of money by the firm

Marginal Product

The increase in output that arises from an additional unit of input

Marginal Cost

The increase in total cost that arises from an extra unit of production

Total Cost

The market value of the inputs a firm uses in production

Economies of Scale

The property whereby long-run average total cost falls as the quantity of output increases EX: Often arise because higher production levels allow specialization among workers, which permits each worker to become better at a specific task. For instance, if Ford hires a large number of workers and produces a large number of cars, it can reduce costs with modern assembly-line production.

Diminishing Marginal Product

The property whereby the marginal product of an input declines as the quantity of the input increases - As the number of workers increases, the marginal product declines, and the production function becomes flatter.

Efficient Scale

The quantity of output that minimizes average total cost

Production Function

The relationship between quantity of inputs used to make a good and the quantity of output of that good

Whenever marginal cost is less than average total cost,

average total cost is falling. EX: Average total cost is like your cumulative grade point average. Marginal cost is like the grade in the next course you will take. If your grade in your next course is less than your grade point average, your grade point average will fall.

The efficient scale of production is the quantity of output that minimizes a. average fixed cost. b. average total cost. c. average variable cost. d. marginal cost.

average total cost.

If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve a. is linear (a straight line). b. could be any of these answers. c. becomes steeper as the quantity of output increases. d. becomes flatter as the quantity of output increases.

becomes steeper as the quantity of output increases.