BUSI620 Managerial Economics Ch 8 Cost Theory and Estimation

question

explicit costs

answer

actual expenditures of the firm to hire, rent, purchase the inputs required for production.

question

implicit costs

answer

the value of the inputs owned and used by the firm in its own production activity.

question

economic costs

answer

alternative or opportunity costs

question

accounting costs

answer

the firms actual expenditures or explicit costs incurred for purchased or rented inputs.

question

incremental cost

answer

change in total costs from implementing a particular mgmt decision, such as intro a new product line, undertaking a new advertising campaign, or the production of a previously purchased component.

question

sunk costs

answer

past costs not affected by the decision, or are irrelevant to a decision.

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total fixed costs (TFC)

answer

e.g., interest payments on borrowed capital, rental expenditures on leased plant or equipment, property taxes, salaries fixed by contract.

question

total variable costs (TVC)

answer

total obligations of the firm per time period for all the variable inputs that the firm uses. variable inputs are payments that a firm can vary easily and on short notice. e.g., fuel, raw materials, depreciation assoc with the use of the plant and equipment, most labor costs, excise taxes.

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total costs (TC)

answer

total fixed costs (TFC)+total variable costs (TVC)

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average fixed cost (AFC)

answer

TFC/output or Q

question

average variable cost (AVC)

answer

TVC/output or Q

question

average total cost (ATC)

answer

TC/output or Q

question

marginal cost (MC)

answer

change in TC or change in TVC per unit of output (Q)

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long-run total cost (LTC)

answer

the minimum total costs of producing various levels of output when the firm can build any desired scale of plant

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long-run average cost (LAC)

answer

LTC/Q

question

long-run marginal cost (LMC)

answer

change in LTC/change in Q

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planning horizon

answer

the long-run...the firm can build the plant that minimizes the cost of producing any anticipated level of output. The firm plans for the long-run, but operates in the short-run.

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economics of scale

answer

the situation in which output grows proportionally faster than inputs.

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economics of scope

answer

the lowering of costs that a firm often experiences when it produces two or more products together rather than each alone.

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learning curve

answer

C=aQ to the b. C=average input cost, a= average cost of 1st unit of output, b= will be negative cuz the average input cost declines with increases cumulative total output. shows the decline in the average input cost of production with rising cumulative total outputs over time. e.g. it may take 1000 hours to assemble the 100th aircraft, but 700 hours to assemble the 200th aircraft because people become more efficient.

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logistics

answer

supply chain management, is the merging at the corporate level of the purchasing, transportation, warehousing, distribution and customer service functions rather than dealing with each of them separately at division level.

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cost-volume-profit analysis or break-even analysis

answer

examines the relationship among the total revenue, total costs, and total profits of the firm at various levels of output.

question

breakeven output (Qb)

answer

Qb=TFC/P-AVC

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Qt = target output

answer

(TFC+πt)/(P-AVC), where Qt=target output, π is target profit

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operation leverage

answer

the ratio of the firms total fixed costs to total variable costs. The higher the ratio, the more leverage the firm is said to have.

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degree of operating leverage (DOL)

answer

(change in π/change in Q)*(Q/π)

1 of 26

question

explicit costs

answer

actual expenditures of the firm to hire, rent, purchase the inputs required for production.

question

implicit costs

answer

the value of the inputs owned and used by the firm in its own production activity.

question

economic costs

answer

alternative or opportunity costs

question

accounting costs

answer

the firms actual expenditures or explicit costs incurred for purchased or rented inputs.

question

incremental cost

answer

change in total costs from implementing a particular mgmt decision, such as intro a new product line, undertaking a new advertising campaign, or the production of a previously purchased component.

question

sunk costs

answer

past costs not affected by the decision, or are irrelevant to a decision.

question

total fixed costs (TFC)

answer

e.g., interest payments on borrowed capital, rental expenditures on leased plant or equipment, property taxes, salaries fixed by contract.

question

total variable costs (TVC)

answer

question

total costs (TC)

answer

total fixed costs (TFC)+total variable costs (TVC)

question

average fixed cost (AFC)

answer

TFC/output or Q

question

average variable cost (AVC)

answer

TVC/output or Q

question

average total cost (ATC)

answer

TC/output or Q

question

marginal cost (MC)

answer

change in TC or change in TVC per unit of output (Q)

question

long-run total cost (LTC)

answer

the minimum total costs of producing various levels of output when the firm can build any desired scale of plant

question

long-run average cost (LAC)

answer

LTC/Q

question

long-run marginal cost (LMC)

answer

change in LTC/change in Q

question

planning horizon

answer

the long-run...the firm can build the plant that minimizes the cost of producing any anticipated level of output. The firm plans for the long-run, but operates in the short-run.

question

economics of scale

answer

the situation in which output grows proportionally faster than inputs.

question

economics of scope

answer

the lowering of costs that a firm often experiences when it produces two or more products together rather than each alone.

question

learning curve

answer

question

logistics

answer

question

cost-volume-profit analysis or break-even analysis

answer

examines the relationship among the total revenue, total costs, and total profits of the firm at various levels of output.

question

breakeven output (Qb)

answer

Qb=TFC/P-AVC

question

Qt = target output

answer

(TFC+πt)/(P-AVC), where Qt=target output, π is target profit

question

operation leverage

answer

the ratio of the firms total fixed costs to total variable costs. The higher the ratio, the more leverage the firm is said to have.

question

degree of operating leverage (DOL)

answer

(change in π/change in Q)*(Q/π)

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BUSI620 Managerial Economics Ch 8 Cost Theory and Estimation

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