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?

It shifts downward for larger quantities. Signup and view all the answers

Which of the following best describes Perfect Competition?

Many firms with identical products and no barriers to entry. Signup and view all the answers

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

Pure Monopoly Signup and view all the answers

What characterizes the shape of short-run ATC curves?

They form 'U-shapes' based on efficiency. Signup and view all the answers

What defines an oligopoly market structure?

Few firms with either identical or differentiated products and significant barriers to entry. Signup and view all the answers

What is the formula for calculating economic profit?

Total revenue - (Explicit Costs + Implicit Costs) Signup and view all the answers

Which type of cost varies with the level of output?

Variable Costs Signup and view all the answers

What indicates zero economic profit?

Total revenue equals both explicit and implicit costs Signup and view all the answers

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

AP rises Signup and view all the answers

Which of the following best describes diminishing marginal product?

Adding more of a variable input results in smaller increases in output Signup and view all the answers

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

When MP rises, MC falls Signup and view all the answers

Which of the following is true about fixed costs?

They remain constant regardless of production levels Signup and view all the answers

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

Long-Run Average Total Cost (LRATC) 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?

$40,000 Signup and view all the answers

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

3 Signup and view all the answers

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

Total Revenue - (Explicit Costs + Implicit Costs) Signup and view all the answers

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

30 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?

$3,550 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?

$60 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?

It is $10. Signup and view all the answers

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

$30,000 Signup and view all the answers

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

Horizontal line Signup and view all the answers

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

It shifts to a new position. Signup and view all the answers

When is profit maximized for a perfectly competitive firm?

Where MR = MC. Signup and view all the answers

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

MR > MC. Signup and view all the answers

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

Shut down temporarily. Signup and view all the answers

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

Market price decreases. Signup and view all the answers

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

Perfectly elastic Signup and view all the answers

What signifies long-run equilibrium in a market?

All firms earn zero economic profit. Signup and view all the answers

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

TR = $8 × 3 = $24 Signup and view all the answers

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

They restrict output to maximize profit. Signup and view all the answers

What are negative externalities?

Costs that spill over onto others. Signup and view all the answers

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

Overproduction due to low private costs. Signup and view all the answers

How can governments address positive externalities?

By providing subsidies. Signup and view all the answers

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

Social cost exceeds private cost. Signup and view all the answers

What dictates efficient output in industries affected by negative externalities?

When marginal social cost equals marginal social benefit. Signup and view all the answers

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

Subsidies to lower production costs. Signup and view all the answers

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

Production is reduced and prices increase. Signup and view all the answers

What is the primary challenge in measuring externalities?

Non-monetary costs such as health impacts are difficult to measure. 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?

Marginal Social Cost = $50 + $20 = $70. Signup and view all the answers

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

Provide a subsidy of $500 per student to increase education supply. 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?

Tax = $20 per unit. Signup and view all the answers

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

It overproduces compared to the true cost to society. Signup and view all the answers

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

It aligns private benefits with social benefits. Signup and view all the answers

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

To discourage overproduction and ensure market efficiency. Signup and view all the answers

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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Description

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.