Microeconomics Chapter 13

Suppose you own and operate your own business. Furthermore, suppose that interest rates rise and another firm offers you a job paying twice what you thought you were worth in the labor market. What has happened to your accounting profit? What has happened to your economic profit? Are you more or less likely to continue to operate your own firm?

Accounting profit is unchanged. Economic profit is reduced because implicit costs have risen—the opportunity cost of your invested money and of your time both went up. You are less likely to continue to operate your own firm because it is less profitable.

When a small firm expands the scale of it operation, why does it usually first experience increasing returns to scale? When the same firm grows to be extremely large, why might a further expansion of the scale of operation generate decreasing returns to scale?

As a small firm ecpands the scale of operation, the higher production level allows for greater specialization of the workers and long-run average total cost falls? As an enormous firm continues to expands, it will likely develop coordination problems and long-run average total cost begins to increase.

Fixed costs

Cost that do not vary with the quantity of output produced

How does economic profit differ from accounting profit?

Economic profit is total revenue minus explicit cost and implicit costs. Accounting profit is total revenue minus explicit costs.

Average Fixed Cost

FC/Q

In the long run, as a firm expands its production facilities, it generally first experiences dis-economies of scales, then constant returns to scale, and finally economies of scale. T or F

False. A firm generally experiences economies of scale, constant returns to scale, and dis-economies of scale as the scale of production expands.

Average total costs are total costs divided by marginal costs. T or F

False. Average total costs are total costs divided by the quantity of output.

The efficient scale for a firm is the quantity of output that minimizes marginal cost. T or F

False. Efficient scale minimizes average total costs.

The average total cost curve crossed the marginal cost curve at the minimum of the marginal cost curve. T or F

False. The marginal cost curve crossed the average total cost curve at the minimum of the average total cost curve/

Wages and salaries paid to workers are an example of implicit costs of production. T or F

False. Wages and salaries are explicit costs of production because dollars flow out of the firm.

If the production function for a firm exhibits diminishing marginal product the corresponding total cost curve for the firm will become flatter as the quantity of output expands. T or F

False. diminishing marginal product means that it requires ever greater amounts of an input to produce equal increments of output so total costs rise at an increasing rate.

When a production function gets flatter, the marginal product is increasing. T or F

False. marginal product is the slope of the production function, so marginal product is decreasing when the production function gets flatter.

If a firm is operating in the area of constants returns to scale, what will happen to the ATC in the short run if the firm expands production/ Why? What will happen to the ATC in the long run? Why?

In the short run, the size of the production facility is fixed, so the firm will experience diminishing returns and increasing average total costs when adding additional workers. In the long run, the firm will expand the size of the factory and the number of worker together, and if the firm experiences constant returns to scale =, ATC will remain fixed at the minimum.

Implicit Costs

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

Explicit Costs

Input cost that require an outlay of money by the firm

Is the salary f management in a firm a fixed cost or a variable cost? Why?

It is a fixed cost because the salary paid to the management does not vary with the quantity produced.

What is the efficient scale of a firm?

It is the quantity of production that minimizes average total cost.

Explain the relationship between marginal cost and average total cost.

MC<ATC => ATC down, MC>ATC => ATC up, MC=ATC => ATC unchanged

What is profit?

Profit= total revenue- total cost

Average Total Cost

TC/Q

Production Function

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

Total Revenue

The amount a firm recieves for the sale of its output.

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.

Dis-economies of scale

The property whereby long-run average total cost rises as the quantity of output increases

Constant returns to scale

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

Diminishing Marginal Product

The property whereby the marginal product of an input declines as the quantity of the input increases.

Efficient Scale

The qunatity of output that minimizes average total cost.

What is the relationship between the production functions ad total cost curve?

The total cost curve reflects the production function. When an input exhibits diminishing marginal product, the production funtion gets flatter because additional increments of inputs increase output by even smaller amounts. Correspondingly, the total cost curve gets steeper as the amount produced rises.

Profit

Total revenue- total cost

Economic Profit

Total revenue- total costs, including both explicit and implicit costs.

Accounting Profit

Total revenue- total explicit costs

If a firm continues to employ more workers within the same size factory, it will eventually experience diminishing marginal product. T or F

True

Total revenue equals the quantity of output the firm produces times the price at which it sells its output. T or F

True

Fixed costs plus variable costs equal total cost. T or F

True.

If there are implicit costs of production, accounting profits will exceed economic profits. T or F

True.

If total revenue is $100, explicit costs are $50, and implicit costs are $30, then accounting profit equals $50. T or F

True.

If, as the quantity produced increases, a production function first exhibits increasing marginals product and later diminishing marginal product, the corresponding marginal- cost curve will be U- shaped. T or F

True.

The average total cost curve in the long run is flatter than the average total cost curve in the short run. T or F

True.

When marginal costs are below average total costs, average total costs must be falling. T or F

True.

What is the shape of the MC curve in the typical firm? Why is it shaped this way?

Typically, the MC curve is U-shaped. The firm often experiences increasing marginal product at very small levels of output as workers are allowed to specialize in their activities. Thus, marginal cost falls. At some point, the firm will experience diminishing marginal product, and the marginal cost curve will begin to rise.

Average Variable Cost

VC/Q