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Questions and Answers
Which of the following best describes an economic cost?
Which of the following best describes an economic cost?
- The accounting profit minus the normal profit.
- The explicit costs minus the implicit costs.
- The monetary payment for a resource.
- The payment required to obtain and retain the services of a resource. (correct)
How is economic profit calculated?
How is economic profit calculated?
- Revenue - Accounting Costs
- Revenue - Explicit Costs
- Accounting Profit - Explicit Costs
- Accounting Profit - Implicit Costs (correct)
What is the key difference between the short run and the long run in production?
What is the key difference between the short run and the long run in production?
- In the short run, all inputs are variable, while in the long run, some inputs are fixed.
- In the short run, some inputs are fixed, while in the long run, all inputs are variable. (correct)
- In the short run, firms can adjust plant size, while in the long run, they cannot.
- In the short run, firms can enter and exit the industry, while in the long run, they cannot.
If a firm's total product increases from 50 to 60 when it adds one unit of labor, what is the marginal product of that additional unit of labor?
If a firm's total product increases from 50 to 60 when it adds one unit of labor, what is the marginal product of that additional unit of labor?
What does the law of diminishing returns state?
What does the law of diminishing returns state?
A firm is producing 100 units of output. Its total fixed cost is $500 and its total variable cost is $1500. What is the average fixed cost (AFC)?
A firm is producing 100 units of output. Its total fixed cost is $500 and its total variable cost is $1500. What is the average fixed cost (AFC)?
A company's total fixed costs are $1,000. Its total costs are $3,000 when producing 50 units. What is the company's average variable cost?
A company's total fixed costs are $1,000. Its total costs are $3,000 when producing 50 units. What is the company's average variable cost?
If a firm's total costs increase from $100 to $150 when output increases from 10 to 20 units, what is the marginal cost?
If a firm's total costs increase from $100 to $150 when output increases from 10 to 20 units, what is the marginal cost?
Which of the following is true regarding the relationship between average total cost (ATC) and marginal cost (MC)?
Which of the following is true regarding the relationship between average total cost (ATC) and marginal cost (MC)?
In the long run, which of the following is true for a firm's costs?
In the long run, which of the following is true for a firm's costs?
What are economies of scale?
What are economies of scale?
Which of the following is a reason for diseconomies of scale?
Which of the following is a reason for diseconomies of scale?
What does 'minimum efficient scale' (MES) refer to?
What does 'minimum efficient scale' (MES) refer to?
Increasing specialization of labor typically results in
Increasing specialization of labor typically results in
Which factor is more likely to cause diseconomies of scale?
Which factor is more likely to cause diseconomies of scale?
Average product is
Average product is
If marginal product is greater than average product, then
If marginal product is greater than average product, then
The law of diminishing returns indicates that
The law of diminishing returns indicates that
The main reason for diseconomies of scale is
The main reason for diseconomies of scale is
Which of the following distinguishes the short run from the long run?
Which of the following distinguishes the short run from the long run?
Suppose a firm produces 200,000 units a year, and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs are $300,000. The firm has
Suppose a firm produces 200,000 units a year, and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs are $300,000. The firm has
Which cost decreases continually as output increases?
Which cost decreases continually as output increases?
Global Perspective 9.1 uses the term relative manufacturing costs. These costs are influenced by all of the following, EXCEPT:
Global Perspective 9.1 uses the term relative manufacturing costs. These costs are influenced by all of the following, EXCEPT:
If average variable costs are the same as marginal costs the:
If average variable costs are the same as marginal costs the:
Assume a lease requires a firm to pay $20,000 a year in rent regardless of production, This cost is:
Assume a lease requires a firm to pay $20,000 a year in rent regardless of production, This cost is:
If the price of labor or some other variable resource increases, the:
If the price of labor or some other variable resource increases, the:
Compared to explicit costs, implicit costs are best described as:
Compared to explicit costs, implicit costs are best described as:
In the short run, the average total cost (ATC) curve usually:
In the short run, the average total cost (ATC) curve usually:
What is the most likely direction of the long-run average total cost (ATC) curve if technology improves gradually in an industry?
What is the most likely direction of the long-run average total cost (ATC) curve if technology improves gradually in an industry?
Flashcards
Economic cost
Economic cost
The payment that must be made to obtain and retain the services of a resource.
Explicit costs
Explicit costs
Monetary outlay; an actual disbursement of money.
Implicit costs
Implicit costs
The opportunity cost of using self-owned resources.
Accounting profit
Accounting profit
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Economic profit
Economic profit
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Short run
Short run
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Long run
Long run
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Total Product (TP)
Total Product (TP)
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Marginal Product (MP)
Marginal Product (MP)
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Average Product (AP)
Average Product (AP)
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Law of Diminishing Returns
Law of Diminishing Returns
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Fixed Costs (TFC)
Fixed Costs (TFC)
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Variable Costs (TVC)
Variable Costs (TVC)
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Total Cost (TC)
Total Cost (TC)
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Average Fixed Cost (AFC)
Average Fixed Cost (AFC)
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Average Variable Cost (AVC)
Average Variable Cost (AVC)
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Average Total Cost (ATC)
Average Total Cost (ATC)
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Marginal Cost (MC)
Marginal Cost (MC)
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Long-Run
Long-Run
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Long-Run ATC
Long-Run ATC
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Economies of scale
Economies of scale
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Diseconomies of scale
Diseconomies of scale
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Minimum efficient scale
Minimum efficient scale
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Natural monopoly
Natural monopoly
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Study Notes
Economic Costs
- Economic cost is the payment required to obtain and retain resources
- Explicit costs are monetary outlays
- Implicit costs represent the opportunity cost of using self-owned resources
- Implicit costs include normal profit
Accounting Profit and Normal Profit
- Accounting profit is calculated as revenue minus explicit costs
- Economic profit is calculated as accounting profit minus implicit costs
- Economic profit can be summarized as revenue less economic costs, or revenue less explicit and implicit costs.
Short Run and Long Run
- The short run consists of some variable inputs with a fixed plant
- The long run is when all inputs are variable
- In the long run, firms can change plant size and enter or exit the industry
Short-Run Production Relationships
- Total Product (TP)
- Marginal Product (MP) is change in total product divided by change in labor input
- Average Product (AP) is total product divided by units of labor
Law of Diminishing Returns
- The law of diminishing returns states that with equal quality resources and fixed technology, adding variable resources to fixed resources will eventually cause marginal product to fall
Short-Run Production Costs
- Fixed costs (TFC) don't vary with output
- Variable costs (TVC) do vary with output
- Total cost (TC) is the sum of TFC and TVC as TC = TFC + TVC
Per-Unit, or Average, Costs
- Average fixed cost (AFC) is TFC/Q
- Average variable cost (AVC) is TVC/Q
- Average total cost (ATC) is TC/Q
- Marginal cost (MC) is ΔTC/ΔQ
Long-Run Production Costs
- Firms can change all input amounts, including plant size in the long run
- All costs are variable in the long run
- Long-run ATC considers costs in terms of average total costs
Economies of Scale
- Economies of scale include labor specialization, managerial specialization, efficient capital, and other factors
- Constant returns to scale exist
Diseconomies of Scale
- Diseconomies of scale consist of control and coordination problems, communication problems, worker alienation, and shirking
Minimum Efficient Scale
- Minimum efficient scale (MES) is the lowest level of output at which long-run average costs are minimized
- MES can determine industry structure
- A natural monopoly occurs when long-run costs are minimized with only one firm producing
Applications and Illustrations
- Rising gasoline prices can be shown in the illustration
- Applications like Weber Metals stamping machine
- Successful startup firms and aircraft and concrete plants
Last Word: Living on a Cloud
- Many firms require massive computing power
- Companies obtain computing power by buying and operating computers
- Investing in computing power poses a risk for firms facing uncertainty in future output sales
- Cloud computing enables firms to outsource their computational computational needs
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