Microeconomics Chapter 11, Chapter 11 Quiz, Microeconomics Chapter 11
Technological Change
A change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Average fixed cost
AFC=TFC/Q
What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?
ATC=TC/Q; MC=ΔTC/ΔQ.
What is higher? Accounting Profit or Economic Profit? And why?
Accounting Profit because it ignores implicit costs.
Average cost:
cost/unit
Suppose First City Bank determines that it must lower its average cost of providing banking services in the long run to become profitable. If the bank experiences economies of scale economies of scale, what could it do? With economies of scale economies of scale, First City Bank
could lower its long−run run average cost by providing more services
Economies of scale happen when the firm's long run average total cost ________ as output increases.
decreases
As the level of output increases, what happens to the difference between the value of average total cost and average variable cost? As the level of output increases, the difference between the value of average total cost and average variable cost
decreases because average fixed cost decreases as output increases.
Any cost that remains unchanged as output changes represents a firm's
fixed cost
Average Fixed Cost (AFC) Equation
fixed cost / Quantity of output produced
TVC is determined
from production function and prices of the variables
What is the production function? The production function is the relationship between
he inputs employed by a firm and the maximum output it can produce with those inputs.
If the firm's marginal costs are $5 at every level of output, what shape will the firm's average total cost have? The firm's average total cost curve will be ______
horizontal
The marginal cost curve intersects both the average variable cost and the average total cost curves at their _____ points
minimum
Small business owner Jay Goltz described several decisions he made to reduce the fixed costs of his businesses, including replacing halogen lamps with LED lamps. Goltz noted, "...I'm guessing that many business owners could save a lot more than pennies on their fixed costs, and those savings...fall right to the bottom line." a. The cost of electricity used to power the lights used in Mr. Goltz' businesses are fixed costs because these costs
must be paid regardless of the volume of output
Long run
the time period in which all inputs can be varied.
Short run
the time period in which at least one input is fixed.
Economies of scale occur
when a firm's long-run average costs decrease with output.
What are diseconomies of scale? Diseconomies of scale is
when a firm's long-run average costs increase with output.
After playing two football games, a professional football team's defense had given up an average of 32 points per game. After playing a third football game, the team's defense had given up an average of 26 points per game. How many points did the team's defense give up in the third football game?
32(2)=64 26(3)=78 78-64=14
A company that provides home-care for the elderly is able to provide monthly services for 3 patients at a total cost of $1,500 and monthly services for 4 patients at a cost of $2,250. What is the marginal cost of providing monthly services for a 4th patient? The marginal cost is $
750
Suppose a company mows yards with workers & lawn-mowing equipment. What will the firm's isocost line show?
All combinations of workers & equipment that have the same total cost.
How are implicit costs different from explicit costs?
An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.
Average product
Ap=Tp/Quantity of Variable input
For which of the following reason(s) may firms experience economies of scale?
Both managers and workers may become more specialized and hence more productive as output expands., Large firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate., Firm's production may increase with a smaller proportional increase in at least one input.
What is technology?
The process a firm uses to turn inputs into outputs of goods & services.
MC Equation
Change in total cost / change in quantity
Variable Costs (VC)
Costs that change as a firm's output changes
Fixed Costs (FC)
Costs that remain constant
What is the difference between the short run & the long run?
In the short run: at least one input is fixed. In the long run: the firm is able to vary all its inputs, adopt new technology, & change the size of its physical plant.
What is the distinction between the economic short run and the economic long run?
In the short run, at least one input is fixed, but in the long run, the firm can vary all inputs.
What is the difference between the short run and the long run?
In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.
Production Function
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.
What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?
Firms have difficulty coordinating production.
Suppose that Henry Ford had continued to experience increasing returns to scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.
Ford could have profitably sold his cars at a lower price than competitors., Ford would have been able to produce his cars at lower long-run average cost than competitors.
Long Run Average Cost Curve
It shows the lowest cost at which a firm is to produce a given quantity of output in the long run, when no inputs are fixed.
If Jill expects to produce 900 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain.
Jill should build a larger restaurant because average total costs will be lower than for a smaller restaurant.
A student looks at the data in the table to the right and draws this conclusion: "The marginal product of labor is increasing for the first 3 workers hired, and then it declines for the next 3 workers. I guess each of the first 3 workers must have been hard workers. Then Jill must have had to settle for increasingly poor workers." Do you agree with the student's analysis? Briefly explain.
No. Marginal product initially increases due to specialization and then decreases due to the law of diminishing returns.
Total Cost
The cost of all the inputs a firm uses in production
Marginal Cost (MC)
The increase in total cost from producing one more unit.
A student asks, "If the average cost of producing pizzas is lower in the larger restaurant when Jill produces 1,100 pizzas per week, why isn't it also lower when Jill produces 500 per week?" Give a brief answer to the student's question.
The larger restaurant has higher fixed costs than the smaller restaurant.
Minimum Efficient Scale
The level of output at which all economies of scale are exhausted.
Consider the production of hotdogs. Given the average total cost of producing hotdogs illustrated in the graph to the right, which of the following is true of the marginal cost of producing hotdogs?
The marginal cost of producing up to 600 hotdogs is less than the average total cost, but the marginal cost of producing more than 600 hotdogs is greater than the average total cost.; The marginal cost of production is exactly equal to the average total cost at 600 hotdogs.
Short Run
The period of time during which at least one of a firm's inputs is fixed
Constant Returns to Scale
The situation in which a firm's long-run average costs remain unchanged as it increases output
Diseconomies of Scale
The situation in which a firm's long-run average costs rise as the firm increases output.
Economies of Scale
The situation when a firm's long-run average costs fall as it increases the quantity of output it produces.
Average product of labor
The total output produced by a firm divided by the quantity of workers.
Is Jill Johnson correct when she says the following: "I am currently producing 20,000 pizzas per month at a total cost of $60,000. If I produce 20,001 pizzas, my total cost will rise to $60,002. Therefore, my marginal cost of producing pizzas must be increasing."
Though Jill's average total cost of production is decreasing, her marginal cost of producing pizzas could be increasing or decreasing.
Average Total Cost (ATC) Equation
Total Cost / Quantity of Output Produced
Economic Profit
Total Revenue - Total Costs (Explicit & Implicit)
Accounting Profit
Total Revenue - Total Explicit Costs
Average Product of Labor Equation
Total output produced by a firm / quantity of workers
Which of the following is true of the relationship between the average product of labor and the marginal product of labor
Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing.
Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain
Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.
Variable cost
a cost that depends on the quantity of output produced; the cost of a variable input.
Fixed cost
a cost that does not depend on the quantity of output produced; the cost of a fixed input.
What is negative technological change? Negative technological change is when
a firm must use more inputs to produce the same output
An example of technological change is
a firm rearranging the layout of a retail store to increase sales, a firm installing faster or more reliable machinery or equipment a firm hiring less minus skilled workers
Which of the following is an example of positive technological change? Positive technological change occurs when
a firm's workers go through a training program
Total productive curve:
a graphical representation of the production function, showing how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input.
Total cost curve
a graphical representation of the total cost, showing how total cost depends on the quantity of output.
Long run average total cost curve:
a graphical representation showing 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 are implicit costs? An implicit cost is
a nonmonetary opportunity cost.
What is the law of diminishing returns? The law of diminishing returns states that Does it apply in the long run?
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline. No
How do specialization and division of labor typically affect the marginal product of labor? In the initial stages of production, specialization and division of labor lead to an increasing marginal product for workers,
allowing workers to concentrate on a few tasks so that they become more skilled at doing them quickly and efficiently.
UPS has reorganized the routes its drivers take to deliver packages to homes. According to an article in the Wall Street Journal, "The company can save $50 million a year by reducing by one mile the average aggregated daily travel of its drivers." a. This cost saving is
an example of positive technological change.
Fixed Input
an input whose quantity is fixed for a period of time and cannot be varied (for example, land).
variable input
an input whose quantity the firm can vary at any time (for example, labor).
What is the difference in the short run and the long run? In the short run,
at least one of the firm's inputs is fixed, while in the long run, the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant.
Your company incurs a cost for factory rent, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of factory rent
becomes a variable cost.
Further, positive technological change is defined as
being able to produce more output using the same inputs., being able to produce the same output using fewer inputs.
Suppose a firm's average total cost curve is decreasing with output. What can be said of its marginal cost curve? The firm's marginal cost curve must be
below the average total cost curve.
Economic cost
expect cost + implicit cost
TFC
expenditures and implicit costs on fixed input - would include
For Jill Johnson's pizza restaurant, explain whether each of the following is a fixed or variable cost. The payment she makes on her fire insurance policy is a ___ cost
fixed
The lease payment she makes to her landlord who owns the building where her store is located is a ____ cost
fixed
The $300-per-month payment she makes to her local newspaper for running her weekly advertisements is a ______ cost.
fixed
What is a production function? A firm's production function is best described as
illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs.
The short-run average cost can never be less the long-run average costs because
in the long run, all inputs are adjusted including the ones that are fixed in the short run.
The law of diminishing returns applies
in the short run.
Explain how the listed events would affect the following at Southwest Airlines: i. Marginal cost ii. Average variable cost iii. Average fixed cost iv. Average total cost Southwest signs a new contract with the Transport Workers Union that requires the airline to increase wages for its flight attendants. Marginal cost would _______, average variable cost would_____ , average fixed cost would_____ , and average total cost would
increase; increase; remain unchanged; increase
The federal government starts to levy a $20 per passenger carbon emissions tax on all commercial air travel. Marginal cost would __________, average variable cost would _______, average fixed cost would ______, and average total cost would ______.
increase; increase; remain unchanged; increase
When the marginal product of labor is greater than the average product of labor, then the average product of labor must be
increasing
Which of the following is most likely to be a fixed cost for a farmer?
insurance premiums on property
A firm cuts its workforce and is able to maintain its initial level of output. This ____an example of positive technological change.
is
A training program makes a firm's workers more productive. This ___an example of positive technological change.
is
An exercise program makes a firm's workers more healthy and productive. This _____ an example of positive technological change.
is
A firm is able to cut each worker's wage rate by 10 percent and still produce the same level of output. This ____ an example of positive technological change.
is not
A firm rearranges the layout of its factory and finds that by using its initial set of inputs, it can produce exactly as much as before. This ____ an example of positive technological change.
is not
Firms experience economies of scale for several reasons. What is one such reason? A firm might experience economies of scale because
large firms may be able to purchase inputs at lower costs than smaller competitors
When the average product of labor is increasing, the average product of labor is ________ the marginal product of labor, and when the average product of labor is decreasing, the average product of labor is _______ the marginal product of labor.
less than , greater than
Increasing returns to scale:
long-run average total cost declines as output increases (also referred to as economies of scale).
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the
production function.
b. Goltz wrote that reducing fixed costs results in savings that "fall right to the bottom line" because
profit, the bottom line, is revenue minus fixed costs minus variable costs, so a reduction in fixed costs increases profit.
Suppose Sheri owns a restaurant that serves pizza using three inputs: workers, restaurant space (and layout), and ovens. If workers are fixed, restaurant space (and layout) is fixed, and ovens are variable, then Sheri is producing pizza in the
short run
Marginal product:
the additional quantity of output produced by using one more unit of that input.
Demising returns to an input:
the effect observed when an increase in the quantity of an input, while holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.
If the marginal product of labor is falling, is the marginal cost of production rising or falling? Briefly explain. If the additional output from each new worker is falling,
the marginal cost of that output is rising because the only additional cost to producing more output is the additional wages paid to hire more workers.
Long Run
the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decease the size of its physical plant. No fixed costs; all variable costs.
In economics, the best definition of technology is
the process a firm uses to turn inputs into outputs.
Production function:
the relationship between the quantity of inputs a firm uses and the quantity of output it produces.
What is the difference between total cost and variable cost in the long run? In the long run,
the total cost of production equals the variable cost of production.
Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long run, when no inputs are fixed?
the long-run average cost curve
VC
total expenditures on viable inputs e.g. raw materials
The payment she makes to buy pizza dough is a _____ cost
variable
The wages she pays her workers is a ____ cost
variable
Any cost that changes as output changes represents a firm's
variable cost.
In the short run, at least one input is fixed, but in the long run, the firm can vary all inputs.
variable costs
Explain why the marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum. The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because
when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the average, it pulls the average up.
Suppose that last semester your semester GPA was 1.90 and your resulting cumulative GPA was 2.59. Next, suppose that this semester your semester GPA will be 2.00. If so, then your cumulative GPA
will decrease because your "marginal" GPA will be below your cumulative GPA.
Is Jill Johnson correct when she says the following: "I am currently producing 10,000 pizzas per month at a total cost of $40,000 If I produce 10,001 pizzas, my total cost will rise to $40,050. Therefore, my marginal cost of producing pizzas must be increasing."
Jill's average total cost of production is increasing, so her marginal cost of producing pizzas must be increasing
Suppose that Jill Johnson has to choose between building a smaller restaurant and a larger restaurant. In the graph to the right, the relationship between costs and output for the smaller restaurant is represented by the curve ATC1, and the relationship between costs and output for the larger restaurant is represented by the curve ATC 2. If Jill expects to produce 650 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain.
Jill should build a smaller restaurant because average total costs will be lower than for a larger restaurant.
How can marginal cost be recognizing mathematically?
MC = change in TC / change in Q TC - Total Cost Q - Output
How can marginal cost be expressed mathematically? Marginal cost (MC) can be expressed as For example, if the total cost of producing three units of output is $2,477 and the total cost of producing four units of output is $3,276, then the marginal cost of the fourth unit is $
MC=ΔTC/ΔQ, where TC is total cost and Q is output.; 799
Is the amount of time that separates the short run from the long run the same for every firm?
No
Is it possible for a firm to experience a technological change that would increase the marginal product of labor while leaving the average product of labor unchanged? Explain.
No. An increase in the marginal product of labor will increase the average product of labor.
Suppose a firm has no fixed costs, so all of its costs are variable, even in the short run. If the firm's marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm's average total cost curve have a U shape?
No. The average total cost curve will be continually increasing.
Implicit Cost
Non monetary opportunity cost
Sally looks at her college transcript and says to you, "How is this possible? My grade point average (GPA) for this semester's courses is higher than my GPA for last semester's courses, but my cumulative GPA still went down from last semester to this semester." Explain to Sally how this is possible
Sally's GPA for this semester is lower than her cumulative GPA.
In recent years, the United States has experienced large increases in oil production. The increases in oil production are due in large part to a new technology, hydraulic fracturing ("fracking"). Fracking involves injecting a mixture of water, sand, and chemicals into rock formations at high pressure to release oil and natural gas. A news story indicates that economies of scale in fracking may be considerably smaller than in conventional oil drilling. If this view is correct, what would the likely consequences be for the number of firms drilling for oil in the United States?
Since firms can reach minimum efficient scale at a relatively low output rate, there will continue to be a large number of firms drilling for oil in the United States.
Total Cost Equation
TFC + TVC
On what two factors does the cost-minimizing combination of inputs depend?
Technology & input prices
Marginal Product of Labor
The additional output a firm produces as a result of hiring one more worker
Marginal product of labor
The additional output a firm produces as a result of hiring one more worker.
Briefly explain whether you agree or disagree with the following argument: Adam Smith's idea of the gains to firms from the division of labor makes a lot of sense when the good being manufactured is something complex like automobiles or computers, but it doesn't apply in the manufacturing of less complex goods or in other sectors of the economy, such as retail sales.
The argument is incorrect. Gains from division of labor will occur whenever production of a good or provision of a service has multiple tasks.
Why do the marginal product of labor and the average product of labor curves have the shapes illustrated in the graph?
The marginal product of labor initially increases due to specialization and then decreases due to diminishing returns. B. Whenever the marginal product of labor is greater than the average product of labor, it pulls the average product of labor up.
Refer to the to graph on the right. For a certain output range (or quantity of pizzas produced per day), marginal cost is greater than average cost. What is this output range? When marginal cost is less than average total cost, average total cost must be
The output range greater than about 525 pizzas per day; decreasing.
Law of Diminishing Returns
The principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.
What determines pricing decisions?
The relationship between the quantity a firm can produce and its costs.
Average Variable Cost (AVC) Equation
Variable cost / quantity of output produced
The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve is
a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
Which of the following is most likely to a variable cost for a business firm?
cost of shipping products
Explicit Cost
cost that involves spending money
In his autobiography, T. Boone Pickens, a geologist, entrepreneur, and oil company executive, wrote: It's unusual to find a large corporation that's efficient ... When you get an inside look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work Pickens was describing
diseconomies of scale, because he is referring to the inefficiency of a large scale business operation.
Decreasing return to scale:
long-run average total cost increases as output increases (also known as diseconomies of scale).
Constant returns to scale
long-run average total cost is constant as output increases.
Southwest decides on an across-the-board 10 percent cut in executive salaries. Marginal cost would _______, average variable cost would _______, average fixed cost would ______, and average total cost would___________.
remain unchanged; remain unchanged; decreased; decreased
Southwest decides to cut its television advertising budget. Marginal cost would _____ , average variable cost would ______, average fixed cost would ______, and average total cost would____.
remain unchanged; remain unchanged; increase; increase
b. Suppose that UPS saves $50 million per year because of lower gasoline prices. Would that cost saving be due to technological change at the firm? Briefly explain. If UPS saved $50 million annually due to a decrease in gasoline prices, this would be
saving that results from the use of lower priced inputs.
When a positive technological change occurs,
the same output can be produced with fewer inputs., more output can be produced from the same inputs.
The law of diminishing returns states
that adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will eventually cause the marginal product of the variable input to decline. In this case, the marginal product of labor begins to decline when the fourth worker is hired.
What does the short-run production function hold constant? A short-run production function holds constant
the amount of capital
The GPA you earn in a particular semester is your ________ GPA, and your cumulative GPA for all completed semesters is your ________ GPA.
marginal; average