Econ Exam 2 (Ch. 8) - Custom Scholars
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# Econ Exam 2 (Ch. 8)

question
Total revenue minus total cost equals _______________ .
Profit
question
Explicit and implicit costs
Explicit costs
- Tangible, out of pocket expenses
Ex: electricity bill, employee wages, utilities

Implicit costs
Opp costs of doing business, capital, or of owners time
Ex: labor of owner who works for company but does not draw salary, use of owner's car or computer to conduct business
question
Determine whether each of the following statements is true or false: a. Economists consider only explicit costs. b. Implicit and explicit costs are always equal. c. An implicit cost is an opportunity cost. d. All costs are explicit costs e. An implicit cost is monetary
A. False
B. False
C. True
D. False
question
________ costs are tangible out-of-pocket expenses.
explicit
question
Accounting vs Economic Profit
Accounting profit
= TR - explicit costs

Economic profit
= TR - (explicit + implicit costs)
question
Determine whether each of the following statements is true or false with respect to explicit costs:
a. They are not included when measuring accounting profit.
b. They are not included when measuring economic profit
c. They are tangible out-of-pocket expenses
d. They are not measured in terms of dollars.
e. They are more difficult to calculate and easier to miss than implicit costs.

A. False
B. False (both explicit and implicit)
C. True
D. False
E. False
question
For a business that manufactures bicycles, wages paid to employees are an example of what type of cost?
Explicit costs
question
If a firm has total costs of \$535,000, and its implicit costs are \$165,000, how much are its explicit costs?
535,000 - 165,000 = 370,000
question
Remi owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue last year was \$100,000, and his rent was \$3,000 per month. He pays his one employee \$2,000 per month, and the cost of ingredients averages \$500 per month. Remi could earn \$35,000 per year as the manager of a competing pizza restaurant nearby. His explicit costs last year were ______.
3000 (12) + 2000 (12) + 500 (12) = 66,000
question
Lisette is the owner of a bakery that earns zero economic profit. Last year, her total revenue was \$145,000, her rent was \$12,000, her labor costs were \$65,000, and her other monetary expenses were \$25,000. From this information, we know that her explicit costs were _______________________ .
145,000 - 12,000 - 65,000 - 25,000 = 43,000

* zero economic profit
question
Why can implicit costs be difficult to measure for business owners?
Business owners opportunity costs vary based on circumstances
question
If a firm generates \$280,000 in revenue, earns \$120,000 in economic profit, and its explicit costs are \$80,000, how much are its implicit costs?
120,000 = 280,000 - (80,000 +x)
-160,000 = 80,000 + x
X = 80,000
question
Marginal product
The change in output associated with one additional unit of input
question
Change in total output divided by the change in input equals ______.
Marginal product
question
When a firm hires another employee, and as a result, total output increases, the change in total output is known as ______.
Marginal product
question
Lester owns a candy equipment store that produces, among other things, chocolate fountains. With his current 5 employees, his candy equipment store can produce 8 chocolate fountains per day. If he hired a sixth employee, he'd be able to produce 9 chocolate fountains per day. What is the marginal product of the sixth employee in terms of chocolate fountain(s)?
9 - 8 = 1
question
Fatima owns a car shop that repairs, among other things, spoilers. She currently has 6 employees; with 6 employees, her repair shop can repair 9 spoilers per day. If she hired a seventh employee, she'd be able to repair 11 spoilers per day. Therefore, the marginal product of the seventh employee is ________ car spoilers.
11 - 9 = 2
question
Costs in the Short Run
Variable costs (TVC)
- Costs that change with the amount of output (labor)
- Ex: commission on sales, credit card fees, wages of part time staff

Fixed costs (TFC)
- Costs that do not vary with output / do not vary in the short run (capital)
- Ex: rent, insurance

Total costs (TC)
- Sum of variable and fixed costs
- TC = TVC + TFC

Average variable cost (AVC)
- Variable cost divided by the number of units produced
- AVC = TVC / Q

Average fixed cost (AFC)
- Fixed cost divided by the total number of units produced
- AFC = TFC / Q

Average total cost (ATC)
- Total cost divided by the number of units produced
- ATC = TC / Q

Marginal cost (MC)
- TC / Q
question
What do MC, ATC, AVC tell you about economic profits? In other words, given MC, ATC, AVC, how do you determine if firms are earning economic profits?
When ATC and MC cross, our ATC is minimized.
- Once you know the MR, you can find the profit maximizing Q by setting MR = MC.
- calc profit by (P - ATC) x Q

YOU DET THROUGH PROF MAX RULE
question
What is the relationship between MC and specialization?
The MC curve falls due to specialization, because things get cheaper.
question
What does MC say about marginal products?
The MC curve rises due to diminishing marginal product
question
What is the relationship between AVC, ATC, and Total fixed cost?
AVC + AFC = TFC
question
Which inputs are often assumed to be fixed in the short run? Variable in the short run?
Short run
- fixed: ?
- variable: labor
question
What is the relationship between total costs, fixed costs, and variable costs?
total costs are the sum of variable and fixed costs
question
Do fixed costs change as you increase total output?
Fixed costs costs remain the same regardless of level of production or services offered.

- variable costs vary based on the amount of output produced (labor, commission, raw materials)
question
What are good examples of variable costs in the short run?
employee wages and cost of raw materials
question
How do you calculate AVC, AFC (average fixed costs), ATC?
AVC = TVC/Q
AFC = TFC/Q
ATC = TC/Q
question
When is the average total cost curve at its minimum?
where the MC curve crosses or intersects the ATC curve
- the MC curve always intersects the ATC curve at its minimum
question
When the average total cost curve is downward sloping, what must be true about the marginal cost curve?
there are productivity gains from specialization before diminishing marginal product sets in.
- this means the marginal cost curve must have been below the ATC curve

The ATC is directly influenced by the MC, so every point where MC is below ATC it is pulling it down. They cross at the lowest point of the ATC (necessarily), and then MC starts pulling the ATC up with it as it continues to rise.
question
Should a firm always produce at the level of output where marginal cost is lowest?
No. That might not be the best choice, but it depends on the firm's profits.
question
Where would we find a firm's efficient scale of production?
when the average total cost (ATC) is at its minimum, and therefore equals the marginal cost (MC).
question
Review how to fill in a table of MC, AVC, ATC, AFC, TC, TFC, TVC.
...
1 of 32
question
Total revenue minus total cost equals _______________ .
Profit
question
Explicit and implicit costs
Explicit costs
- Tangible, out of pocket expenses
Ex: electricity bill, employee wages, utilities

Implicit costs
Opp costs of doing business, capital, or of owners time
Ex: labor of owner who works for company but does not draw salary, use of owner's car or computer to conduct business
question
Determine whether each of the following statements is true or false: a. Economists consider only explicit costs. b. Implicit and explicit costs are always equal. c. An implicit cost is an opportunity cost. d. All costs are explicit costs e. An implicit cost is monetary
A. False
B. False
C. True
D. False
question
________ costs are tangible out-of-pocket expenses.
explicit
question
Accounting vs Economic Profit
Accounting profit
= TR - explicit costs

Economic profit
= TR - (explicit + implicit costs)
question
Determine whether each of the following statements is true or false with respect to explicit costs:
a. They are not included when measuring accounting profit.
b. They are not included when measuring economic profit
c. They are tangible out-of-pocket expenses
d. They are not measured in terms of dollars.
e. They are more difficult to calculate and easier to miss than implicit costs.

A. False
B. False (both explicit and implicit)
C. True
D. False
E. False
question
For a business that manufactures bicycles, wages paid to employees are an example of what type of cost?
Explicit costs
question
If a firm has total costs of \$535,000, and its implicit costs are \$165,000, how much are its explicit costs?
535,000 - 165,000 = 370,000
question
Remi owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue last year was \$100,000, and his rent was \$3,000 per month. He pays his one employee \$2,000 per month, and the cost of ingredients averages \$500 per month. Remi could earn \$35,000 per year as the manager of a competing pizza restaurant nearby. His explicit costs last year were ______.
3000 (12) + 2000 (12) + 500 (12) = 66,000
question
Lisette is the owner of a bakery that earns zero economic profit. Last year, her total revenue was \$145,000, her rent was \$12,000, her labor costs were \$65,000, and her other monetary expenses were \$25,000. From this information, we know that her explicit costs were _______________________ .
145,000 - 12,000 - 65,000 - 25,000 = 43,000

* zero economic profit
question
Why can implicit costs be difficult to measure for business owners?
Business owners opportunity costs vary based on circumstances
question
If a firm generates \$280,000 in revenue, earns \$120,000 in economic profit, and its explicit costs are \$80,000, how much are its implicit costs?
120,000 = 280,000 - (80,000 +x)
-160,000 = 80,000 + x
X = 80,000
question
Marginal product
The change in output associated with one additional unit of input
question
Change in total output divided by the change in input equals ______.
Marginal product
question
When a firm hires another employee, and as a result, total output increases, the change in total output is known as ______.
Marginal product
question
Lester owns a candy equipment store that produces, among other things, chocolate fountains. With his current 5 employees, his candy equipment store can produce 8 chocolate fountains per day. If he hired a sixth employee, he'd be able to produce 9 chocolate fountains per day. What is the marginal product of the sixth employee in terms of chocolate fountain(s)?
9 - 8 = 1
question
Fatima owns a car shop that repairs, among other things, spoilers. She currently has 6 employees; with 6 employees, her repair shop can repair 9 spoilers per day. If she hired a seventh employee, she'd be able to repair 11 spoilers per day. Therefore, the marginal product of the seventh employee is ________ car spoilers.
11 - 9 = 2
question
Costs in the Short Run
Variable costs (TVC)
- Costs that change with the amount of output (labor)
- Ex: commission on sales, credit card fees, wages of part time staff

Fixed costs (TFC)
- Costs that do not vary with output / do not vary in the short run (capital)
- Ex: rent, insurance

Total costs (TC)
- Sum of variable and fixed costs
- TC = TVC + TFC

Average variable cost (AVC)
- Variable cost divided by the number of units produced
- AVC = TVC / Q

Average fixed cost (AFC)
- Fixed cost divided by the total number of units produced
- AFC = TFC / Q

Average total cost (ATC)
- Total cost divided by the number of units produced
- ATC = TC / Q

Marginal cost (MC)
- TC / Q
question
What do MC, ATC, AVC tell you about economic profits? In other words, given MC, ATC, AVC, how do you determine if firms are earning economic profits?
When ATC and MC cross, our ATC is minimized.
- Once you know the MR, you can find the profit maximizing Q by setting MR = MC.
- calc profit by (P - ATC) x Q

YOU DET THROUGH PROF MAX RULE
question
What is the relationship between MC and specialization?
The MC curve falls due to specialization, because things get cheaper.
question
What does MC say about marginal products?
The MC curve rises due to diminishing marginal product
question
What is the relationship between AVC, ATC, and Total fixed cost?
AVC + AFC = TFC
question
Which inputs are often assumed to be fixed in the short run? Variable in the short run?
Short run
- fixed: ?
- variable: labor
question
What is the relationship between total costs, fixed costs, and variable costs?
total costs are the sum of variable and fixed costs
question
Do fixed costs change as you increase total output?
Fixed costs costs remain the same regardless of level of production or services offered.

- variable costs vary based on the amount of output produced (labor, commission, raw materials)
question
What are good examples of variable costs in the short run?
employee wages and cost of raw materials
question
How do you calculate AVC, AFC (average fixed costs), ATC?
AVC = TVC/Q
AFC = TFC/Q
ATC = TC/Q
question
When is the average total cost curve at its minimum?
where the MC curve crosses or intersects the ATC curve
- the MC curve always intersects the ATC curve at its minimum
question
When the average total cost curve is downward sloping, what must be true about the marginal cost curve?
there are productivity gains from specialization before diminishing marginal product sets in.
- this means the marginal cost curve must have been below the ATC curve

The ATC is directly influenced by the MC, so every point where MC is below ATC it is pulling it down. They cross at the lowest point of the ATC (necessarily), and then MC starts pulling the ATC up with it as it continues to rise.
question
Should a firm always produce at the level of output where marginal cost is lowest?
No. That might not be the best choice, but it depends on the firm's profits.
question
Where would we find a firm's efficient scale of production?
when the average total cost (ATC) is at its minimum, and therefore equals the marginal cost (MC).
question
Review how to fill in a table of MC, AVC, ATC, AFC, TC, TFC, TVC.
...

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