Econ Exam 2 (Ch. 8)

question

Total revenue minus total cost equals _______________ .

answer

Profit

question

Explicit and implicit costs

answer

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

answer

A. False
B. False
C. True
D. False

question

________ costs are tangible out-of-pocket expenses.

answer

explicit

question

Accounting vs Economic Profit

answer

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:

answer

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?

answer

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?

answer

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 ______.

answer

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 _______________________ .

answer

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?

answer

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?

answer

120,000 = 280,000 - (80,000 +x)
-160,000 = 80,000 + x
X = 80,000

question

Marginal product

answer

The change in output associated with one additional unit of input

question

Change in total output divided by the change in input equals ______.

answer

Marginal product

question

When a firm hires another employee, and as a result, total output increases, the change in total output is known as ______.

answer

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)?

answer

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.

answer

11 - 9 = 2

question

Costs in the Short Run

answer

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?

answer

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?

answer

The MC curve falls due to specialization, because things get cheaper.

question

What does MC say about marginal products?

answer

The MC curve rises due to diminishing marginal product

question

What is the relationship between AVC, ATC, and Total fixed cost?

answer

AVC + AFC = TFC

question

Which inputs are often assumed to be fixed in the short run? Variable in the short run?

answer

Short run
- fixed: ?
- variable: labor

question

What is the relationship between total costs, fixed costs, and variable costs?

answer

total costs are the sum of variable and fixed costs

question

Do fixed costs change as you increase total output?

answer

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?

answer

employee wages and cost of raw materials

question

How do you calculate AVC, AFC (average fixed costs), ATC?

answer

AVC = TVC/Q
AFC = TFC/Q
ATC = TC/Q

question

When is the average total cost curve at its minimum?

answer

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?

answer

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?

answer

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?

answer

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.

answer

...

1 of 32

question

Total revenue minus total cost equals _______________ .

answer

Profit

question

Explicit and implicit costs

answer

question

answer

A. False
B. False
C. True
D. False

question

________ costs are tangible out-of-pocket expenses.

answer

explicit

question

Accounting vs Economic Profit

answer

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:

answer

question

For a business that manufactures bicycles, wages paid to employees are an example of what type of cost?

answer

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?

answer

535,000 - 165,000 = 370,000

question

answer

3000 (12) + 2000 (12) + 500 (12) = 66,000

question

answer

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?

answer

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?

answer

120,000 = 280,000 - (80,000 +x)
-160,000 = 80,000 + x
X = 80,000

question

Marginal product

answer

The change in output associated with one additional unit of input

question

Change in total output divided by the change in input equals ______.

answer

Marginal product

question

When a firm hires another employee, and as a result, total output increases, the change in total output is known as ______.

answer

Marginal product

question

answer

9 - 8 = 1

question

answer

11 - 9 = 2

question

Costs in the Short Run

answer

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?

answer

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?

answer

The MC curve falls due to specialization, because things get cheaper.

question

What does MC say about marginal products?

answer

The MC curve rises due to diminishing marginal product

question

What is the relationship between AVC, ATC, and Total fixed cost?

answer

AVC + AFC = TFC

question

Which inputs are often assumed to be fixed in the short run? Variable in the short run?

answer

Short run
- fixed: ?
- variable: labor

question

What is the relationship between total costs, fixed costs, and variable costs?

answer

total costs are the sum of variable and fixed costs

question

Do fixed costs change as you increase total output?

answer

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?

answer

employee wages and cost of raw materials

question

How do you calculate AVC, AFC (average fixed costs), ATC?

answer

AVC = TVC/Q
AFC = TFC/Q
ATC = TC/Q

question

When is the average total cost curve at its minimum?

answer

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?

answer

question

Should a firm always produce at the level of output where marginal cost is lowest?

answer

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?

answer

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.

answer

...

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Econ Exam 2 (Ch. 8)

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