Unit 2 Part 1: Quiz

A pizza business has the cost structure described in the following table. The firm's fixed costs are $20 per day.

$4.00

Billy Bob runs a seafood restaurant. Last year he earned $50,000 in revenue. He had explicit costs of $20,000. Billy Bob could have made $30,000 working for the county and could have received an additional $20,000 if he rented out his building and equipment. Calculate Billy Bob's economic profit.

-$20,000

What is the profit-maximizing output?

25

The following table shows a short-run production function for laptop computers. Use the data to determine where diminishing product begins.

4

A local snow cone business sells snow cones in one size for $5. It has the following cost and output structure per hour. To maximize profit, the firm should produce how many snow cones per hour?

40

A semiprofessional baseball team near your town plays two home games each month at the local baseball park. It splits the concessions 50-50 with the city, but it keeps revenue from ticket sales for itself. The city charges the team $100 each month for the three-month season. The team pays the players and manager a total of $1,000 a month. The team charges $10 for each ticket, and the average customer spends $7 at the concession stand. Attendance averages 30 people at each home game. In order to break even, how many tickets does the team need to sell for each game?

41

In the example presented by this graph, what is total output when the fifth worker is added?

52 lawns mowed

Fixed inputs

A fixed input is a resource or factor of production which cannot be changed in the short run by a firm as it seeks to change the quantity of output produced. Most firms have several fixed inputs in short-run production, especially buildings, equipment, and land.

Specialization

A method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas.

Variable Inputs

A variable input is a resource or factor of production which can be changed in the short run by a firm as it seeks to change the quantity of output produced. Most firms use several variable inputs in short-run production, especially labor, material inputs, and energy.

Labor

Human effort directed toward producing goods and services

Profit-maximizing rule

MR =MC The general rule is that the firm maximizes profit by producing that quantity of output where marginal revenue equals marginal cost.

In the following table, fill in the blanks. Assume the market is perfectly competitive. After you have completed the entire table, determine the profit-maximizing output.

Output 1 2 3 4 5 6 Price $20 $20 $20 $20 $20 $20 Total Revenue (TR)=p*q $20 $40 $60 $80 $100 $120 Marginal Revenue $20 $20 $20 $20 $20 $20 Total Cost $40 $50 $60 $65 $85 $120 Marginal Cost $0 $0 $0 $0 $0 $0 Total Profit -$20 -$10 $0 $15 $15 $0 The profit-maximizing output is 5.

Quantity of Output (Q)

Output in economics is the "quantity of goods or services produced in a given time period, by a firm, industry, or country", whether consumed or used for further production

Long-Run

The long run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs.

Describe what happens tot he total product of a firm when marginal product is increasing, decreasing, and negative.

When marginal product increases, then total product increases when marginal product decreases, then total product decreases when marginal product is negative, then total product is positive

Land

all natural resources used to produce goods and services

Losses

an amount of money lost by a business or organization

Implicit Costs

any cost that has already occurred but is not necessarily shown or reported as a separate expense

Marginal product of capital (MPK)

change in quantity/change in capital

marginal product of labor (MPL)=

change in quantity/change in labor

Quantity=

f (K,L)

Capital

financial wealth, especially that is used to start or maintain a business.

Diminishing marginal product refers to marginal product that initially __________ but eventually __________.

increases; decreases

Factors of Production

land, labor, capital, entrepreneurship(enterprise)

What role does diminishing marginal product play in determining the ideal mix of labor and capital a firm should use?

shows when increases in labor start to make a slower rise in output.

Profits and losses are determined by

subtracting total costs from total revenue.

Marginal Product of Capital (MPK)

the additional output resulting from using an additional unit of capital

Marginal Revenue (MR)

the additional revenue that will be generated by increasing product sales by one unit. In a perfectly competitive market, the additional revenue generated by selling an additional unit of a good is equal to the price the firm is able to charge the buyer of the good.

Economic Profit

the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from revenues earned

Revenue

the income that a business has from its normal business activities, usually fro the sale of goods and services to customers

Entrepreneurship

the process of designing, launching and running a new business

Which of the following is NOT one of the basic roles of profits in a market economy?

to generate a source of tax revenue from the government

Total Cost(TC)

total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and new materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs that cannot be varied in the short term: fixed costs such as building and machinery.

Total Revenue (TR)

total receipts from the sale of a given quantity of goods or services, total income of a business and is calculated by multiplying the quantity of goods sold by the price of the goods

Profit (or loss) =

total revenue - total cost

In the long run, costs are

variable only

Explicit Costs

a direct payment made to others in the course of running a business, such as wage, rent and materials

Profits

a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.

Short-Run

The short run is the concept that, within a certain period in the future, at least one input is fixed while others are variable. The short run does not refer to a specific duration of time but rather is unique to the firm, industry or economic variable being studied.

Which of the following is NOT a factor of production?

output

The price of a competitive firm's product is $50 per unit. The firm currently has marginal cost equal to $40. To maximize profits, this firm

should increase its output.

What is the equation used to calculate a firm's profit (or loss)?

Total Revenue-Total Cost=Profit TR-T; (a negative result is a loss.)

What is the marginal product of the fourth worker?

12

To maximize profits, firms expand output until

MR = MC

Total Cost=

explicit costs + implicit costs

Billy Bob runs a seafood restaurant. Last year he earned $50,000 in revenue. He had explicit costs of $20,000. Billy Bob could have made $30,000 working for the county and could have received an additional $20,000 if he rented out his building and equipment. Calculate Billy Bob's implicit costs.

$50,000

Working as a waiter, you earn $60,000 per year, including tips. Someone offers you a new job as an economic consultant, which pays $100,000 per year. In order to be a consultant, you'll need to rent an office and purchase supplies and new computer equipment. We can conclude which of the following?

If the explicit cost for the consulting job is $25,000 per year, your economic profit is equal to $15,000.

How do profits and losses act as signals that guide producers to use resources to make what society wants most?

Profits and losses signal a need for adjustment in market supply; if there are losses the quantity supplied will decrease and price will rise, if there are profits the quantity supplied will increase and price will drop.

Which of the following does not represent an implicit cost for a business owner?

a worker's salary

Fixed Costs

business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as interest or rents being paid per month, and are often referred to as overhead costs.

Variable Costs

costs that change as the quantity of the good or service that a business produces changes. Variable costs are the sum of marginal costs over all units produced. They can also be considered normal costs.

In the example presented by this graph, at what number of workers does the point of diminishing marginal product occur

fourth worker

production function

gives the technological relation between quantities of physical inputs and quantities of outputs of goods

Which two types of costs does economic profit take into account?

implicit and explicit costs

A local snow cone business sells snow cones in one size for $3 each. It has the following cost and output structure per hour.

output (Cones per hour) 0 10 20 30 40 50 60 70 80 Total Revenue (TR)= PXQ $0 $30 $60 $90 $120 $150 $180 $210 $240 Total Cost (TC) $60 $90 $110 $120 $125 $135 $150 $175 $225 Total Profit=TR-TC -$60 -$60 -$50 -$30 -$5 $15 $30 $35 $15 Marginal Revenue= change in TR/change in Q $3 $3 $3 $3 $3 $3 $3 $3 Marginal Cost=change in TC/change in Q $3 $2 $1 $0.50 $1 $1.50 $2.50 $5 MR is always $3 (P=MR for a perfectly competitive firm). There are two places where MR=MC. The first occurs at Q=10 and the second occurs somewhere between 70 and 80 units of output. To determine which one is the profit-maximizing quantity, compare the profits at both outputs. The profits are higher at the higher output between 70 and 80 units of output (profits are between $15-$35 there) compared to profits at Q=10 (which are -$60). So, the profit-maximizing level of output is somewhere between 70 and 80 snow cones.

The local ice cream shop is trying to figure out how many workers to hire, and part of the decision will be based on the marginal product of labor. The following table shows a short-run production function for quantity of ice cream tubs produced. Diminishing marginal returns begins after hiring which worker?

second

Outputs

the amount of something produced by a person, machine, or industry

Marginal Product

the change in output resulting from employing one more unit of a particular input

Marginal Product of Labor (MPL)

the change in output that results from employing an added unit of labor.

Marginal Cost (MC)

the cost added by producing one additional unit of a product or service.

Scale

the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing with increasing scale.

Diminishing Marginal Product

the understanding that using additional inputs will generally increase output, but there also is a point where adding more input will result in a smaller increase in the output, and there is another point where using even more input will lead to a decrease in output.

Marginal cost=

wage/ marginal product of labor

Inputs

what is put in, taken in, or operated on by any process or system.