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Chapter 7 MicroEconomics Review

question
What is a firm? What is an industry? What are the types of business firms?
answer
Firm=economic institution that specializes in the production of goods and services. Industry=collection of firms. Types of business firms=sole proprietorship, partnership, and corporation.
question
Describe the operating environment of the firm as a legal entity.
answer
The OE of a firm involves key relationships between the firm and those with whom it must deal (owners, customers, input suppliers, and government). They all interact with the firm's management as the decision making unit of the business firm.
question
What is technology? What is a production function?
answer
a method or process that a firm uses to transform inputs into outputs of goods/services. Production function is the relationship between the inputs employed by the firm and the maximum amount of output (Q) the firm can produce with those inputs, over a period of time. Q=f(K,L).
question
Define Short run. Define Long run. Will the short run be the same length of time for a firm in the dry cleaning industry as for a firm in the steel industry?
answer
SR=time period during which a firm cannot vary all inputs; at least one of its inputs remains fixed. LR= a time period long enough for a firm to vary all inputs, including plant capacity. Yes
question
State/explain the law of diminishing marginal returns to the variable input.
answer
as more units of the variable input are added to the fixed amount of other inputs the MP of the variable input will eventually decline.
question
Be able to explain the difference between implicit and explicit costs. Give example of each.
answer
explicit costs involves spending money(wages/salaries, interest, rent, office supplies,) and implicit costs does not involve spending money (depreciation, depletion of business assets, foregone interest income)
question
Define/calculate: total fixed cost
answer
costs of all inputs that are fixed in the SR.
question
define/calculate:total variable cost
answer
costs of all variable inputs used in producing a specific output level (Q)
question
define/calculate:total cost
answer
TC=TFC+TVC. costs of all inputs, fixed and variable
question
define/calculate: marginal cost
answer
the increase in TC by producing one more unit of output. MC=change in TC divided by change in Q.
question
define/calculate: average fixed costs
answer
portion of TFC incurred by producing a typical unit of the output. TFC/ Q
question
define/calculate: average variable costs
answer
portion of TVC incurred by producing a typical unit of the output. TVC/Q
question
define/calculate:average total costs
answer
portion of TC incurred by producing a typical unit of the output. TC/Q or AFC+AVC
question
Explain how MP is related to MC.
answer
In the SR, when MP rises, MC falls and conversely.
question
Why might a firm change its plant/store size in the LR?
answer
bc the time period is long enough to change all the inputs, including the size of the plant.
question
Why might the costs of production be lower in the LR than in the SR? Why is LRATC u-shaped?
answer
u-shaped because a firm's LRATC's decline as output increases. constant returns to scale or CRS: a firm's LRATCs remain constant as output rises. a firm's LRATCs rise as output increases. IRS occurs from gains from specialization of labor and management. CRS occurs from most firms expanding operations by replicating plant sizes while maintaining a constant rate between input and output level. DRS occurs bc some firms become so big that management loses the flexibility to adapt quickly.
question
Define: economies of scale, constant returns to scale, diseconomies of scale, and the reasons that they occur.
answer
economies of scale: a firm's LRATCs decline as output increases. CRS: remain constant as output rises. DRS: a firms LRATCs rise as output increases.
question
Explain the 5 differences between accounting profit and economic profit. If a firm states that it is earning 5% profit in its annual shareholders report, is it earning an economic profit? What is a normal economic profit?
answer
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question
What is a firm? What is an industry? What are the types of business firms?
answer
Firm=economic institution that specializes in the production of goods and services. Industry=collection of firms. Types of business firms=sole proprietorship, partnership, and corporation.
question
Describe the operating environment of the firm as a legal entity.
answer
The OE of a firm involves key relationships between the firm and those with whom it must deal (owners, customers, input suppliers, and government). They all interact with the firm's management as the decision making unit of the business firm.
question
What is technology? What is a production function?
answer
a method or process that a firm uses to transform inputs into outputs of goods/services. Production function is the relationship between the inputs employed by the firm and the maximum amount of output (Q) the firm can produce with those inputs, over a period of time. Q=f(K,L).
question
Define Short run. Define Long run. Will the short run be the same length of time for a firm in the dry cleaning industry as for a firm in the steel industry?
answer
SR=time period during which a firm cannot vary all inputs; at least one of its inputs remains fixed. LR= a time period long enough for a firm to vary all inputs, including plant capacity. Yes
question
State/explain the law of diminishing marginal returns to the variable input.
answer
as more units of the variable input are added to the fixed amount of other inputs the MP of the variable input will eventually decline.
question
Be able to explain the difference between implicit and explicit costs. Give example of each.
answer
explicit costs involves spending money(wages/salaries, interest, rent, office supplies,) and implicit costs does not involve spending money (depreciation, depletion of business assets, foregone interest income)
question
Define/calculate: total fixed cost
answer
costs of all inputs that are fixed in the SR.
question
define/calculate:total variable cost
answer
costs of all variable inputs used in producing a specific output level (Q)
question
define/calculate:total cost
answer
TC=TFC+TVC. costs of all inputs, fixed and variable
question
define/calculate: marginal cost
answer
the increase in TC by producing one more unit of output. MC=change in TC divided by change in Q.
question
define/calculate: average fixed costs
answer
portion of TFC incurred by producing a typical unit of the output. TFC/ Q
question
define/calculate: average variable costs
answer
portion of TVC incurred by producing a typical unit of the output. TVC/Q
question
define/calculate:average total costs
answer
portion of TC incurred by producing a typical unit of the output. TC/Q or AFC+AVC
question
Explain how MP is related to MC.
answer
In the SR, when MP rises, MC falls and conversely.
question
Why might a firm change its plant/store size in the LR?
answer
bc the time period is long enough to change all the inputs, including the size of the plant.
question
Why might the costs of production be lower in the LR than in the SR? Why is LRATC u-shaped?
answer
u-shaped because a firm's LRATC's decline as output increases. constant returns to scale or CRS: a firm's LRATCs remain constant as output rises. a firm's LRATCs rise as output increases. IRS occurs from gains from specialization of labor and management. CRS occurs from most firms expanding operations by replicating plant sizes while maintaining a constant rate between input and output level. DRS occurs bc some firms become so big that management loses the flexibility to adapt quickly.
question
Define: economies of scale, constant returns to scale, diseconomies of scale, and the reasons that they occur.
answer
economies of scale: a firm's LRATCs decline as output increases. CRS: remain constant as output rises. DRS: a firms LRATCs rise as output increases.
question
Explain the 5 differences between accounting profit and economic profit. If a firm states that it is earning 5% profit in its annual shareholders report, is it earning an economic profit? What is a normal economic profit?
answer
...
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