Economics: Cost Concepts and Market Structures
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Questions and Answers

What is the formula for calculating Total Cost (TC)?

  • TC = FC * VC
  • TC = VC / FC
  • TC = FC + VC (correct)
  • TC = VC - FC

What is the Average Total Cost (ATC) for producing 51 widgets?

  • $69.61 (correct)
  • $50.00
  • $70.00
  • $75.00

What happens to the Marginal Cost as more labor is added after a certain point?

  • It increases due to Diminishing Marginal Product. (correct)
  • It remains constant.
  • It decreases continuously.
  • It becomes zero.

How does the short-run Average Total Cost (ATC) curve change when a firm expands its plant size in the long run?

<p>It shifts downward for larger quantities. (A)</p> Signup and view all the answers

Which of the following best describes Perfect Competition?

<p>Many firms with identical products and no barriers to entry. (B)</p> Signup and view all the answers

In which market structure do firms have the power to set prices?

<p>Pure Monopoly (B)</p> Signup and view all the answers

What characterizes the shape of short-run ATC curves?

<p>They form 'U-shapes' based on efficiency. (D)</p> Signup and view all the answers

What defines an oligopoly market structure?

<p>Few firms with either identical or differentiated products and significant barriers to entry. (C)</p> Signup and view all the answers

What is the formula for calculating economic profit?

<p>Total revenue - (Explicit Costs + Implicit Costs) (C)</p> Signup and view all the answers

Which type of cost varies with the level of output?

<p>Variable Costs (B)</p> Signup and view all the answers

What indicates zero economic profit?

<p>Total revenue equals both explicit and implicit costs (C)</p> Signup and view all the answers

What happens to average product (AP) when marginal product (MP) rises?

<p>AP rises (D)</p> Signup and view all the answers

Which of the following best describes diminishing marginal product?

<p>Adding more of a variable input results in smaller increases in output (D)</p> Signup and view all the answers

What is the relationship between marginal product (MP) and marginal cost (MC)?

<p>When MP rises, MC falls (C)</p> Signup and view all the answers

Which of the following is true about fixed costs?

<p>They remain constant regardless of production levels (A)</p> Signup and view all the answers

Which cost reflects the average total cost when all inputs are variable?

<p>Long-Run Average Total Cost (LRATC) (A)</p> Signup and view all the answers

What is the accounting profit for the business owner who invested $100,000 and earned $120,000 in revenue with $80,000 in explicit costs?

<p>$40,000 (D)</p> Signup and view all the answers

When does diminishing marginal product begin for the bakery employing workers to produce cupcakes?

<p>3 (D)</p> Signup and view all the answers

How is economic profit calculated in the context of the business owner’s investment?

<p>Total Revenue - (Explicit Costs + Implicit Costs) (D)</p> Signup and view all the answers

What is the marginal product when hiring the second worker in the bakery example?

<p>30 (D)</p> Signup and view all the answers

What is the total cost when producing 51 widgets with fixed costs of $1,000 and variable costs of $2,550?

<p>$3,550 (D)</p> Signup and view all the answers

How is the average total cost (ATC) for producing 51 widgets calculated with a total cost of $3,550?

<p>$60 (C)</p> Signup and view all the answers

Which of the following is true about the marginal cost (MC) when the production increases from 50 to 51 widgets?

<p>It is $10. (D)</p> Signup and view all the answers

What is the economic profit for the business owner after considering opportunity costs?

<p>$30,000 (B)</p> Signup and view all the answers

What is the shape of a perfectly competitive firm's demand curve at the market price?

<p>Horizontal line (B)</p> Signup and view all the answers

What happens to the firm's demand curve when the market price changes?

<p>It shifts to a new position. (A)</p> Signup and view all the answers

When is profit maximized for a perfectly competitive firm?

<p>Where MR = MC. (C)</p> Signup and view all the answers

Which of the following scenarios indicates a firm should increase production?

<p>MR &gt; MC. (A)</p> Signup and view all the answers

What should a firm do if the price is below the average variable cost (AVC)?

<p>Shut down temporarily. (C)</p> Signup and view all the answers

What occurs in a market when positive economic profits attract new firms?

<p>Market price decreases. (B)</p> Signup and view all the answers

In a constant-cost industry, what is the shape of the long-run supply curve?

<p>Perfectly elastic (B)</p> Signup and view all the answers

What signifies long-run equilibrium in a market?

<p>All firms earn zero economic profit. (C)</p> Signup and view all the answers

What is the calculation for total revenue (TR) based on the given data?

<p>TR = $8 × 3 = $24 (C)</p> Signup and view all the answers

Why do monopolies have a higher equilibrium price compared to perfectly competitive markets?

<p>They restrict output to maximize profit. (C)</p> Signup and view all the answers

What are negative externalities?

<p>Costs that spill over onto others. (A)</p> Signup and view all the answers

What result do negative externalities lead to in terms of production efficiency?

<p>Overproduction due to low private costs. (A)</p> Signup and view all the answers

How can governments address positive externalities?

<p>By providing subsidies. (C)</p> Signup and view all the answers

What is the relationship between social cost and private cost when negative externalities are present?

<p>Social cost exceeds private cost. (D)</p> Signup and view all the answers

What dictates efficient output in industries affected by negative externalities?

<p>When marginal social cost equals marginal social benefit. (C)</p> Signup and view all the answers

Which of the following is NOT a government intervention for negative externalities?

<p>Subsidies to lower production costs. (D)</p> Signup and view all the answers

What happens to the production levels when producers are forced to compensate for external costs?

<p>Production is reduced and prices increase. (A)</p> Signup and view all the answers

What is the primary challenge in measuring externalities?

<p>Non-monetary costs such as health impacts are difficult to measure. (D)</p> Signup and view all the answers

How is the marginal social cost calculated when a factory produces at a marginal private cost of $50 with a marginal external cost of $20?

<p>Marginal Social Cost = $50 + $20 = $70. (A)</p> Signup and view all the answers

What action can the government take to address the supply inefficiency of education that generates a positive externality?

<p>Provide a subsidy of $500 per student to increase education supply. (A)</p> Signup and view all the answers

If a coal plant is causing $1,000 in total external costs while producing 50 units of electricity, what is the recommended tax per unit to internalize this externality?

<p>Tax = $20 per unit. (C)</p> Signup and view all the answers

What occurs if a factory does not account for the marginal external cost in its production?

<p>It overproduces compared to the true cost to society. (B)</p> Signup and view all the answers

What is the effect of a subsidy provided for education in terms of private and social benefits?

<p>It aligns private benefits with social benefits. (B)</p> Signup and view all the answers

What is one of the primary reasons a government would impose taxation on firms causing negative externalities?

<p>To discourage overproduction and ensure market efficiency. (D)</p> Signup and view all the answers

Flashcards

Opportunity Cost

The value of the best alternative forgone when making a choice.

Explicit Costs

Costs that require monetary payment, such as wages, rent, or materials.

Implicit Costs

Costs that do not require monetary payment, often associated with the owner's time, effort, or resources used in a business.

Economic Profit

Total revenue minus both explicit and implicit costs.

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Accounting Profit

Total revenue minus explicit costs only.

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Sunk Costs

Costs that have already been incurred and cannot be recovered.

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Zero Economic Profit

A situation where a business just covers all its costs, including both explicit and implicit costs. Also referred to as normal profit.

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Short Run

The period where at least one input of production remains fixed, while other inputs can vary.

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Marginal Product

The additional output produced by hiring one more worker.

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Diminishing Marginal Product

The point at which the marginal product of labor begins to decrease. Each additional worker adds less to the total output.

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Total Cost (TC)

The sum of all costs incurred in producing a good or service, including both fixed and variable costs.

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Average Total Cost (ATC)

The total cost divided by the number of units produced. It tells you the average cost per unit.

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Marginal Cost (MC)

The change in total cost resulting from producing one more unit. It tells you the cost of producing one additional unit.

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Long-Run Average Total Cost (LRATC)

The long-run average total cost curve is derived by connecting the minimum points of a series of short-run average total cost curves, each representing a different plant size.

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Shape of MC Curve

The initial decrease and subsequent increase in Marginal Cost (MC) is due to increasing and then diminishing Marginal Product (MP) of labor.

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LRATC & SRATC Relationship

The long-run average total cost (LRATC) curve represents the most efficient plant size for each level of output. It is formed by the 'envelope' of all possible short-run average total cost (SRATC) curves.

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Perfect Competition

A market structure where many firms sell identical products with no barriers to entry. Firms are price takers, meaning they must accept the prevailing market price.

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Monopolistic Competition

A market structure with many firms selling differentiated products. Some barriers to entry exist, allowing firms to have some price-setting power.

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Oligopoly

A market structure characterized by a small number of firms, either selling identical or differentiated products. Significant barriers to entry exist, restricting competition.

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Marginal Social Cost (MSC)

The additional cost to society of producing one more unit, including both private costs and external costs.

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Marginal Private Cost (MPC)

The cost incurred by the producer for producing one more unit.

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External Cost

The cost imposed on society by an activity, not reflected in the market price (e.g., pollution).

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Internalizing Externalities

The process of incorporating the social cost of an activity into its market price.

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Positive Externality

When a good generates benefits for third parties not involved in the transaction (e.g., education).

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Subsidy

A government payment to encourage the production of a good with a positive externality.

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Pigouvian tax

A tax imposed on activities that generate negative externalities, to encourage reduction (e.g., pollution tax).

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Per-unit tax

A tax on each unit of output, designed to internalize the negative externality.

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What is an externality?

A cost or benefit that spills over to parties not involved in the activity.

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What is underproduction in economics?

The tendency for markets to underproduce goods that create positive externalities, leading to less than optimal social benefits.

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What causes overproduction in economics?

A situation where the private cost of production is lower than the true social cost, leading to overproduction and inefficiency.

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Why does a monopoly lead to higher prices and lower quantities?

When firms face a downward-sloping demand curve, they restrict output to maximize profit, resulting in higher prices and lower quantities compared to perfect competition.

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What is socially optimal output, Q_social, in the context of externalities?

The efficient output level that occurs when the industry internalizes external costs, aligning private cost with social cost.

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What is a government intervention for negative externalities?

Taxes on activities that generate negative externalities.

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What is a government intervention for positive externalities?

Subsidies for activities that generate positive externalities.

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What is social cost in economics?

The total cost to society, including both private and external costs.

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Marginal Revenue (MR)

The additional revenue generated from selling one more unit of a good or service.

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Profit-Maximizing Output

The output level where Marginal Revenue (MR) equals Marginal Cost (MC). This is the point where profit is maximized.

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Normal Profit

The situation where a firm's Total Revenue (TR) equals its Total Cost (TC). The firm earns zero economic profit, but does cover all its expenses.

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Shut-Down Point

The point where a firm's Price (P) is below its Average Variable Cost (AVC). In this situation, the firm should shut down operations in the short run to minimize its losses.

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Short-Run Supply Curve

The portion of the firm's Marginal Cost (MC) curve that lies above its Average Variable Cost (AVC) curve. It represents the firm's supply curve in the short run.

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Long-Run Equilibrium

The long-run market equilibrium where all firms earn zero economic profit and there is no incentive for firms to enter or exit the market.

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Long-Run Supply Curve

The long-run supply curve for a perfectly competitive industry. It can be perfectly elastic (horizontal), upward sloping, or downward sloping, depending on the industry's cost structure.

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Study Notes

Chapter 7: Understanding Profits and Costs

  • Key Concepts:
    • Opportunity Cost: The value of the next best alternative forgone when making a choice
    • Explicit Costs: Costs requiring monetary payment (e.g., wages, rent).
    • Implicit Costs: Costs not requiring monetary payment (e.g., owner's time).
    • Economic Profit: Total revenue minus the sum of explicit and implicit costs.
    • Accounting Profit: Total revenue minus explicit costs.
    • Sunk Costs: Costs that are already incurred and cannot be recovered; irrelevant to future decisions.
    • Zero Economic Profit: Also called normal profit; indicates that a business covers all explicit and implicit costs.

Chapter 7: Production in the Short Run

  • Key Concepts:

    • Short Run: A period where at least one input is fixed.
    • Production Function: The relationship between quantities of inputs and the resulting output.
    • Total Product (TP): Total output produced.
    • Diminishing Marginal Product: Occurs when adding more of a variable input (e.g., labor) yields smaller increases in output.
    • Marginal Product (MP): Additional output gained from using one more unit of a variable input.
    • Average Product (AP): Output per unit of a variable input.

  • Relationships:

    • When Marginal Product (MP) is greater than Average Product (AP), Average Product (AP) rises.
    • When Marginal Product (MP) is less than Average Product (AP), Average Product (AP) falls.

Chapter 7: Costs in the Short Run

  • Types of Costs:

    • Fixed Costs (TFC): Costs that do not vary with output (e.g., rent).
    • Variable Costs (TVC): Costs that vary with output (e.g., materials, labor).
    • Total Costs (TC): The sum of fixed costs and variable costs (TC = TFC + TVC).

  • Cost per Unit:

    • Average Costs: Costs expressed on a per-unit basis:
      • Average Fixed Cost (AFC): TFC/Quantity
      • Average Variable Cost (AVC): TVC/Quantity
      • Average Total Cost (ATC): TC/Quantity or AFC + AVC.
      • Marginal Cost (MC): Change in total cost for producing one more unit of output.

Chapter 8: Market Structures

  • Market Structures:
    • Perfect Competition: Many firms, identical products, no barriers to entry, price takers.
    • Monopolistic Competition: Many firms, differentiated products, some barriers to entry.
    • Oligopoly: Few firms, either identical or differentiated products, significant barriers to entry.
    • Pure Monopoly: One firm, unique product, significant barriers to entry, price maker.

Chapter 8: Individual Pricing Takers' Demand Curve

  • Perfect Competition Characteristics:
    • Firms sell at the market price, which is determined by supply & demand.
    • Perfectly elastic demand curve (horizontal line at the market price).
    • Changes in the market price shift the firm's demand line.

Chapter 8: Profit Maximization

  • Key Revenue Concepts:

    • Total Revenue (TR) = Price (P) × Quantity (q).
    • Marginal Revenue (MR) = change in total revenue / change in quantity.
    • Average Revenue (AR) = Total Revenue (TR) / Quantity (q).

  • Profit-Maximizing Methods:

    • Total Revenue - Total Cost Method: Find the output level with the highest profit.
    • Marginal Approach: Find the output level where MR = MC (the profit maximizing point).

  • Profit Conditions:

    • If Marginal Revenue (MR) > Marginal Cost (MC), increase production to boost profit.
    • If Marginal Revenue (MR) < Marginal Cost (MC), decrease production to reduce losses.
    • Profit is maximized where MR = MC.

Chapter 9: Monopoly

  • Sources of Monopoly Power:

    • Legal barriers (e.g., patents, licenses).
    • Economies of scale (natural monopolies).
    • Control of essential resources.

  • Monopolist's Demand Curve:

    • Downward-sloping (not perfectly elastic like in perfect competition).

  • Profit Maximization:

    • A monopoly maximizes profits where marginal revenue (MR) equals marginal cost (MC).

Chapter 12: Externalities

  • Definition: An externality is a cost or benefit of consumption/production that spills over to parties not involved in the activity.
  • Negative Externalities: Occur when costs spill over to others (e.g., pollution). (Social cost = private cost + external cost)
  • Positive Externalities: Occur when benefits spill over to others (e.g., education).
  • Government Intervention:
    • Negative Externalities: Taxes, regulation, to align private costs with social costs
    • Positive Externalities: Subsidies, regulation, to align private benefits with social benefits.

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This quiz explores key concepts related to total cost, average total cost, and market structures in economics. It covers the calculations and implications of costs such as marginal and fixed costs, as well as characteristics of perfect competition and oligopoly. Test your understanding of these fundamental economic principles.

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