Economics Chapter 10 Final Review

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a firm

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is an institution that hires factors of production andorganizes them to produce and sell goods and services

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A firm’s goal is to

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maximize profit

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If the firm fails to maximize its profit

answer

the firm is either eliminated or taken over by another firm that seeks to maximize profit

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Accountants measure

answer

firm’s profit to ensure that the firm pays the correct amount of tax and to show investors how their funds are being used

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Profit equals

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total revenue - total cost

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Economists measure

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a firm’s profit to enable them to predict the firm’s decisions, and the goal of these decisions is to maximize economic profit

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economic profit

answer

is equal to total revenue minus total cost,with total cost measured as the opportunity cost ofproduction

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A firm’s opportunity cost of production is the sum of the cost of using resources

answer

Bought in the market

Owned by the firm

Supplied by the firm's owner

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The amount spent by a firm on resources bought in the market is

answer

an opportunity cost of production because the firm could have bought different resources to produce some other good or service

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If the firm owns capital and uses it to produce its output

answer

then the firm incurs an opportunity cost

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The firm incurs an opportunity cost of production because

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it could have sold the capital and rented capital from another firm

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The firm’s opportunity cost of using the capital it owns is called the

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implicit rental rate of capital

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The implicit rental rate of capital is made up of

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1. Economic depreciation
2. Forgone interest

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economic depreciation

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is the change in the market value of capital over a given period

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Interest forgone is the

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return on the funds used to acquire the capital

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profit

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The owner might supply both entrepreneurship and labour. The return to entrepreneurship is

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normal profit

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The profit that an entrepreneur can expect to receive on average is called

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Normal profit is the

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cost of entrepreneurship and is an opportunity cost of production

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The opportunity cost of the owner’s labour is the

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wage income forgone by not taking the best alternative job.

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Economic profit equals

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a firm’s total revenue minus its total opportunity cost of production

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Profit Maximixation

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The firm makes many decisions to achieve its main objective

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decisions

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Some decisions are critical to the survival of the firm. Some decisions are irreversible (or very costly to reverse). Other decisions are easily reversed and are less critical to the survival of the firm, but still influence profit.

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All decisions can be placed in two time frames:

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in the short run, in the long run

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the short run

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is a time frame in which the quantity of one or more resources used in production is fixed

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For most firms, the capital, called the firm’s plant

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is fixed in the short run

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short run

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Other resources used by the firm (such as labour, raw materials, and energy) can be changed in the...

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Short-run decisions are

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easily reversed

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the long run

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is a time frame in which the quantities of all resources—including the plant size—can be varied.

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Long-run decisions are

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not easily reversed

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sunk cost

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is a cost incurred by the firm and cannot be

changed

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If a firm’s plant has no resale value

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the amount paid for it is a sunk cost. Sunk costs are irrelevant to a firm’s current decisions

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To increase output in the short run

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a firm must increase the amount of labor employed

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Three concepts describe the relationship between output and the quantity of labour employed

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1. Total product

2. Marginal product

3. Average product

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total output

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is the total output produced in a given period

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The marginal product of labour

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is the change in total product that results from a one-unit increase in the quantity of labour employed, with all other inputs remaining the same

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The average product of labour

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is equal to total product divided by the quantity of labour employed

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As the quantity of labour employed increases

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-Total Product increases
-Marginal Product increases initially, but eventually decreases
-Average Product decreases

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Product curves

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show how the firm’s total product, marginal product, and average product change as the firm varies the quantity of labour employed

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The total product curve shows how

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total product changes with the quantity of labour employed

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The total product curve is similar to the PPF.It separates

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attainable output levels from unattainable output levels in the short run

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marginal product curve

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shows the marginal product of labour curve and how the marginal product curve relates to the total product curve

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Almost all production processes are like the one shown here and have

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Increasing marginal returns initially

Diminishing marginal returns eventually

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The firm experiences increasing marginal returns

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Initially, the marginal product of a worker exceeds the marginal product of the previous worker

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The firm experiences diminishing marginal returns

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Eventually, the marginal product of a worker is less than the marginal product of the previous worker

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Increasing marginal returns arise from

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increased specialization and division of labor

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Diminishing marginal returns arises because

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each additional worker has less access to capital and less space in which to work

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Diminishing marginal returns are so pervasive that they are

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elevated to the status of a “law.”

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The law of diminishing returns states that

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adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.

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This graph shows the

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average product curve and its relationship with the marginal product curve

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When marginal product exceeds average product

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average product increases

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When marginal product is below average product

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average product decreases

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When marginal product equals average product

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average product is at its maximum

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To produce more output in the short run, the firm must

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employ more labour, which means that it must increase its costs

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Three cost concepts and three types of cost curves are

answer

Total cost

Marginal cost

Average cost

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Total Cost (TC)

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is the cost of all resources used

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Total fixed cost (TFC)

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is the cost of the firm’s fixed inputs. Fixed costs do not change with output.

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Total variable cost (TVC)

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is the cost of the firm’s variable inputs. Variable costs do change with output

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Total cost equals

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total fixed cost + total variable cost

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This graph shows a total cost curve

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Total fixed cost is the same at each output level.Total variable cost increases as output increases.Total cost, which is the sum of TFC and TVC also increases as output increases

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We can replace the quantity of labour on the x-axis with total variable cost. When we do that, we must change the name of the curve. It is now the TVC curve.But it is graphed with cost on the x-axis and output on the y-axis

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To see the relationship between the TVC curve and the TP curve, lets look again at the TP curve.But let us add a second x-axis to measure total variable cost.

1 worker costs $25;2 workers cost $50:

and so on, so the two x-axes line up

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total variable cost curve

answer

a graph that shows the relationship between total variable cost and the level of a firm's output

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Marginal cost (MC)

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is the increase in total cost that results from a one-unit increase in total product

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Over the output range with increasing marginal returns

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marginal cost falls as output increases.

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Over the output range with diminishing marginal returns

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marginal cost rises as output increases

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Average fixed cost (AFC)

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is total fixed cost per unit of output.

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Average variable cost (AVC)

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is total variable cost per unit of output

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Average total cost (ATC)

answer

is total cost per unit of output

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average total cost =

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average fixed cost + average variable cost

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The shapes of a firm’s cost curves are determined by

answer

the technology it uses

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marginal cost is at its minimum at the same output level at which

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marginal product is at its maximum

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when marginal product is rising

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marginal cost is falling

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average variable cost is at its minimum at the same output level at which

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average product is at its maximum

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when average product is rising

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average variable cost is falling

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The position of a firm’s cost curves depend on two factors

answer

Technology

Prices of factors of production

question

Technological change influences both the product curves and the cost curves. An increase in productivity shifts the

answer

product curves upward and the cost curves downward

question

If a technological advance results in the firm using more capital and less labour

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fixed costs increase and variable costs decrease

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An increase in the price of a factor of production increases costs

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and shifts the cost curves

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An increase in a fixed cost shifts the total cost (TC) and average total cost (ATC)

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curves upward but does not shift the marginal cost (MC) curve

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An increase in a variable cost shifts

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the total cost (TC), average total cost (AT ), and marginal cost (MC) curves upward

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In the long run

answer

all inputs are variable, and all costs are

variable.

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The behavior of long-run cost depends upon the firm’s

answer

production function

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production function

answer

is the relationship between the maximum output attainable and the quantities of both capital and labour.

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As the size of the plant increases

answer

the output that a given quantity of labour can produce increases.But for each plant, as the quantity of labour increases, diminishing returns occur

question

marginal product of capital

answer

is the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labour employed.

question

A firm’s production function exhibits

answer

diminishing marginal returns to labour (for a given plant) as well as diminishing marginal returns to capital (for a quantity of labour)

question

For each plant, diminishing marginal product of labour creates a

answer

set of short run, U-shaped costs curves for MC,AVC, and ATC

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The larger the plant

answer

the greater is the output at which ATC is at a minimum.

question

The firm has 4 different plants

answer

1, 2, 3, or 4 knitting machines

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Each plant has a

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short-run ATC curve

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The firm can compare

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the ATC for each output at different plants

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average total cost curve

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ATC1 is the ATC curve for a plant with 1 knitting machine. ATC2 is the ATC curve for a plant with 2 knitting machines. ATC3 is the ATC curve for a plant with 3 knitting machines. ATC4 is the ATC curve for a plant with 4 knitting machines.

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The long-run average cost curve is made up from the lowest ATC for each output level.So

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we want to decide which plant has the lowest cost for producing each output level.Let’s find the least-cost way of producing a given output level.Suppose that the firm wants to produce 13 sweaters a day

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The least-cost way of producing 13 sweaters a day is to use 2 knitting machines. (lowest ATC)

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13 sweaters a day cost $7.69 each on ATC1. 13 sweaters a day cost $6.80 each on ATC2. 13 sweaters a day cost $7.69 each on ATC3. 13 sweaters a day cost $9.50 each on ATC4.

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long-run average cost curve

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is the relationship between the lowest attainable average total cost and output when both the plant and labour are varied

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The long-run average cost curve is a

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planning curve that tells the firm the plant that minimizes the cost of producing a given output range.Once the firm has chosen its plant, the firm incurs the costs that correspond to the ATC curve for that plant

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long-run average cost curve...

answer

pic

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Economies of scale

answer

are features of a firm’s technology that lead to falling long-run average cost as output increases

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Diseconomies of scale

answer

are features of a firm’s technology that lead to rising long-run average cost as output increases

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Constant returns to scale

answer

are features of a firm’s technology that lead to constant long-run average cost as output increases

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economies and diseconomies of scale

answer

graph

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Minimum efficient scale

answer

is the smallest quantity of output at which the long-run average cost reaches its lowest level

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If the long-run average cost curve is U-shaped

answer

the minimum point identifies the minimum efficient scale output level

1 of 102

question

a firm

answer

is an institution that hires factors of production andorganizes them to produce and sell goods and services

question

A firm’s goal is to

answer

maximize profit

question

If the firm fails to maximize its profit

answer

the firm is either eliminated or taken over by another firm that seeks to maximize profit

question

Accountants measure

answer

firm’s profit to ensure that the firm pays the correct amount of tax and to show investors how their funds are being used

question

Profit equals

answer

total revenue - total cost

question

Economists measure

answer

a firm’s profit to enable them to predict the firm’s decisions, and the goal of these decisions is to maximize economic profit

question

economic profit

answer

is equal to total revenue minus total cost,with total cost measured as the opportunity cost ofproduction

question

A firm’s opportunity cost of production is the sum of the cost of using resources

answer

Bought in the market

Owned by the firm

Supplied by the firm's owner

question

The amount spent by a firm on resources bought in the market is

answer

an opportunity cost of production because the firm could have bought different resources to produce some other good or service

question

If the firm owns capital and uses it to produce its output

answer

then the firm incurs an opportunity cost

question

The firm incurs an opportunity cost of production because

answer

it could have sold the capital and rented capital from another firm

question

The firm’s opportunity cost of using the capital it owns is called the

answer

implicit rental rate of capital

question

The implicit rental rate of capital is made up of

answer

1. Economic depreciation
2. Forgone interest

question

economic depreciation

answer

is the change in the market value of capital over a given period

question

Interest forgone is the

answer

return on the funds used to acquire the capital

question

profit

answer

The owner might supply both entrepreneurship and labour. The return to entrepreneurship is

question

normal profit

answer

The profit that an entrepreneur can expect to receive on average is called

question

Normal profit is the

answer

cost of entrepreneurship and is an opportunity cost of production

question

The opportunity cost of the owner’s labour is the

answer

wage income forgone by not taking the best alternative job.

question

Economic profit equals

answer

a firm’s total revenue minus its total opportunity cost of production

question

Profit Maximixation

answer

The firm makes many decisions to achieve its main objective

question

decisions

answer

question

All decisions can be placed in two time frames:

answer

in the short run, in the long run

question

the short run

answer

is a time frame in which the quantity of one or more resources used in production is fixed

question

For most firms, the capital, called the firm’s plant

answer

is fixed in the short run

question

short run

answer

Other resources used by the firm (such as labour, raw materials, and energy) can be changed in the...

question

Short-run decisions are

answer

easily reversed

question

the long run

answer

is a time frame in which the quantities of all resources—including the plant size—can be varied.

question

Long-run decisions are

answer

not easily reversed

question

sunk cost

answer

is a cost incurred by the firm and cannot be

changed

question

If a firm’s plant has no resale value

answer

the amount paid for it is a sunk cost. Sunk costs are irrelevant to a firm’s current decisions

question

To increase output in the short run

answer

a firm must increase the amount of labor employed

question

Three concepts describe the relationship between output and the quantity of labour employed

answer

1. Total product

2. Marginal product

3. Average product

question

total output

answer

is the total output produced in a given period

question

The marginal product of labour

answer

is the change in total product that results from a one-unit increase in the quantity of labour employed, with all other inputs remaining the same

question

The average product of labour

answer

is equal to total product divided by the quantity of labour employed

question

As the quantity of labour employed increases

answer

-Total Product increases
-Marginal Product increases initially, but eventually decreases
-Average Product decreases

question

Product curves

answer

show how the firm’s total product, marginal product, and average product change as the firm varies the quantity of labour employed

question

The total product curve shows how

answer

total product changes with the quantity of labour employed

question

The total product curve is similar to the PPF.It separates

answer

attainable output levels from unattainable output levels in the short run

question

marginal product curve

answer

shows the marginal product of labour curve and how the marginal product curve relates to the total product curve

question

Almost all production processes are like the one shown here and have

answer

Increasing marginal returns initially

Diminishing marginal returns eventually

question

The firm experiences increasing marginal returns

answer

Initially, the marginal product of a worker exceeds the marginal product of the previous worker

question

The firm experiences diminishing marginal returns

answer

Eventually, the marginal product of a worker is less than the marginal product of the previous worker

question

Increasing marginal returns arise from

answer

increased specialization and division of labor

question

Diminishing marginal returns arises because

answer

each additional worker has less access to capital and less space in which to work

question

Diminishing marginal returns are so pervasive that they are

answer

elevated to the status of a “law.”

question

The law of diminishing returns states that

answer

adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.

question

This graph shows the

answer

average product curve and its relationship with the marginal product curve

question

When marginal product exceeds average product

answer

average product increases

question

When marginal product is below average product

answer

average product decreases

question

When marginal product equals average product

answer

average product is at its maximum

question

To produce more output in the short run, the firm must

answer

employ more labour, which means that it must increase its costs

question

Three cost concepts and three types of cost curves are

answer

Total cost

Marginal cost

Average cost

question

Total Cost (TC)

answer

is the cost of all resources used

question

Total fixed cost (TFC)

answer

is the cost of the firm’s fixed inputs. Fixed costs do not change with output.

question

Total variable cost (TVC)

answer

is the cost of the firm’s variable inputs. Variable costs do change with output

question

Total cost equals

answer

total fixed cost + total variable cost

question

This graph shows a total cost curve

answer

Total fixed cost is the same at each output level.Total variable cost increases as output increases.Total cost, which is the sum of TFC and TVC also increases as output increases

question

answer

To see the relationship between the TVC curve and the TP curve, lets look again at the TP curve.But let us add a second x-axis to measure total variable cost.

1 worker costs $25;2 workers cost $50:

and so on, so the two x-axes line up

question

total variable cost curve

answer

a graph that shows the relationship between total variable cost and the level of a firm's output

question

Marginal cost (MC)

answer

is the increase in total cost that results from a one-unit increase in total product

question

Over the output range with increasing marginal returns

answer

marginal cost falls as output increases.

question

Over the output range with diminishing marginal returns

answer

marginal cost rises as output increases

question

Average fixed cost (AFC)

answer

is total fixed cost per unit of output.

question

Average variable cost (AVC)

answer

is total variable cost per unit of output

question

Average total cost (ATC)

answer

is total cost per unit of output

question

average total cost =

answer

average fixed cost + average variable cost

question

The shapes of a firm’s cost curves are determined by

answer

the technology it uses

question

marginal cost is at its minimum at the same output level at which

answer

marginal product is at its maximum

question

when marginal product is rising

answer

marginal cost is falling

question

average variable cost is at its minimum at the same output level at which

answer

average product is at its maximum

question

when average product is rising

answer

average variable cost is falling

question

The position of a firm’s cost curves depend on two factors

answer

Technology

Prices of factors of production

question

Technological change influences both the product curves and the cost curves. An increase in productivity shifts the

answer

product curves upward and the cost curves downward

question

If a technological advance results in the firm using more capital and less labour

answer

fixed costs increase and variable costs decrease

question

An increase in the price of a factor of production increases costs

answer

and shifts the cost curves

question

An increase in a fixed cost shifts the total cost (TC) and average total cost (ATC)

answer

curves upward but does not shift the marginal cost (MC) curve

question

An increase in a variable cost shifts

answer

the total cost (TC), average total cost (AT ), and marginal cost (MC) curves upward

question

In the long run

answer

all inputs are variable, and all costs are

variable.

question

The behavior of long-run cost depends upon the firm’s

answer

production function

question

production function

answer

is the relationship between the maximum output attainable and the quantities of both capital and labour.

question

As the size of the plant increases

answer

the output that a given quantity of labour can produce increases.But for each plant, as the quantity of labour increases, diminishing returns occur

question

marginal product of capital

answer

is the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labour employed.

question

A firm’s production function exhibits

answer

diminishing marginal returns to labour (for a given plant) as well as diminishing marginal returns to capital (for a quantity of labour)

question

For each plant, diminishing marginal product of labour creates a

answer

set of short run, U-shaped costs curves for MC,AVC, and ATC

question

The larger the plant

answer

the greater is the output at which ATC is at a minimum.

question

The firm has 4 different plants

answer

1, 2, 3, or 4 knitting machines

question

Each plant has a

answer

short-run ATC curve

question

The firm can compare

answer

the ATC for each output at different plants

question

average total cost curve

answer

question

The long-run average cost curve is made up from the lowest ATC for each output level.So

answer

question

The least-cost way of producing 13 sweaters a day is to use 2 knitting machines. (lowest ATC)

answer

13 sweaters a day cost $7.69 each on ATC1. 13 sweaters a day cost $6.80 each on ATC2. 13 sweaters a day cost $7.69 each on ATC3. 13 sweaters a day cost $9.50 each on ATC4.

question

long-run average cost curve

answer

is the relationship between the lowest attainable average total cost and output when both the plant and labour are varied

question

The long-run average cost curve is a

answer

question

long-run average cost curve...

answer

pic

question

Economies of scale

answer

are features of a firm’s technology that lead to falling long-run average cost as output increases

question

Diseconomies of scale

answer

are features of a firm’s technology that lead to rising long-run average cost as output increases

question

Constant returns to scale

answer

are features of a firm’s technology that lead to constant long-run average cost as output increases

question

economies and diseconomies of scale

answer

graph

question

Minimum efficient scale

answer

is the smallest quantity of output at which the long-run average cost reaches its lowest level

question

If the long-run average cost curve is U-shaped

answer

the minimum point identifies the minimum efficient scale output level

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Economics Chapter 10 Final Review

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