Cost Function Overview

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Questions and Answers

What happens to average and marginal costs when the average product and marginal product are rising?

Both average and marginal costs decrease (correct)

Average cost increases while marginal cost decreases

Average cost decreases while marginal cost increases

Both average and marginal costs increase

Average fixed cost remains constant regardless of the level of output.

False

What does U-shaped average and marginal costs imply about production?

It implies that costs fall to a minimum and then begin to rise due to the law of diminishing marginal product.

When a firm is experiencing increasing returns to variable inputs, the average and marginal costs are ______.

decreasing Signup and view all the answers

Match the following terms with their definitions:

Marginal Cost = Cost of providing one more unit Average Total Cost = Total cost divided by output Average Variable Cost = Variable cost divided by output Average Fixed Cost = Fixed cost divided by output Signup and view all the answers

What is the relationship between cost and price?

Cost determines the price and profit from sales Signup and view all the answers

Implicit costs are the payments made to non-owners for resources utilized.

False Signup and view all the answers

What are explicit costs?

Payments made to non-owners for resources used in production. Signup and view all the answers

The total fixed cost remains the same regardless of the level of ______.

output Signup and view all the answers

Match the following types of costs with their descriptions:

Explicit cost = Payment made to non-owners for resources Implicit cost = Opportunity cost of owned resources Total fixed cost = Cost that stays the same regardless of production Total variable cost = Cost that varies with the level of production Signup and view all the answers

Which of the following is an example of implicit cost?

Interest earnings from a bank account Signup and view all the answers

What must a firm at least earn to cover its implicit costs?

$300,000 Signup and view all the answers

What happens to total variable cost when the output is zero?

It is equal to zero. Signup and view all the answers

Total cost is the sum of total variable cost and total fixed cost.

True Signup and view all the answers

What does AFC stand for in cost analysis?

Average Fixed Cost Signup and view all the answers

As output increases, total variable cost also ____.

increases Signup and view all the answers

Match the costs with their definitions:

TC = Total Cost TFC = Total Fixed Cost TVC = Total Variable Cost AFC = Average Fixed Cost Signup and view all the answers

Which of the following is a component of total cost?

Total Fixed Cost Signup and view all the answers

Average Total Cost can only be calculated by dividing total cost by the quantity of output.

False Signup and view all the answers

Provide an example of a variable cost.

Labor, utility, or raw materials Signup and view all the answers

The formula for Average Total Cost (ATC) is ___ = TC/Q.

Average Total Cost Signup and view all the answers

Study Notes

Cost Function

Cost is the expense of producing a product or service.
Price is what a customer pays.
Cost directly affects price and profit.
Cost function describes the relationship between output and production cost.
Cost includes input prices multiplied by the quantity of inputs.
Economic cost is more than just historical cost; it includes opportunity cost (the value of the next best alternative use of resources).

Types of Cost

Explicit costs: Payments to non-owners for resources (salaries, materials).
Implicit costs: Opportunity costs of resources owned by the firm (entrepreneur's salary, building rent). Total implicit cost = $300,000

Cost Based on Variation with Production

Total fixed costs: Costs for fixed resources (buildings, machinery, insurance). Does not change with output level.
Total variable costs: Costs that change with the level of output; (labor, utilities, raw materials).

Unit Cost

Total cost (TC): Total fixed cost + Total variable cost.
Average total cost (ATC): Total cost / Quantity of output.
Average fixed cost (AFC): Total fixed cost / Quantity of output.
Average variable cost (AVC): Total variable cost / Quantity of output.
Marginal cost (MC): Change in total cost from producing one more unit.
Average cost curves are U-shaped (falling, then rising).
Marginal cost curves intersect (cross) Average cost curve at the minimum point of average cost.
When marginal cost is below average total cost (ATC), ATC falls.
Marginal cost and average costs are directly related: when MC is below ATC, ATC is decreasing. When MC is above ATC, ATC is increasing.

Relationship Between Average and Marginal Costs

When marginal cost is below average cost, average cost falls.
When marginal cost is above average cost, average cost rises.
Average cost is lowest where it intersects marginal cost.

Relationship Between Cost and Output

Total variable cost changes directly with the level of output.
Fixed costs remain the same regardless of output level.

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Description

This quiz explores the concept of cost functions, including the distinctions between explicit and implicit costs. It covers how costs relate to pricing and profit, as well as variations based on production levels. Test your understanding of fixed and variable costs within the framework of economic principles.