MICRO ECON EXAM 3

question

The equilibrium rent on office space has just increased by $500/month. Determine the effects on accounting profit and economic profit if you rent your office space

answer

Both the accounting and economic profits would fall when renting your office space.

question

The equilibrium rent on office space has just increased by $500/month. Determine the effects on accounting profit and economic profit if you own your office space

answer

The economic profit would fall when owning your own office space due to implicit costs

question

What is the most competitive market structure

answer

Perfect competition

question

Profit =

answer

Total Revenue (TR) - Total Cost (TC)

question

Total revenue

answer

the amount a firm receives from the sale of its output

question

Total cost

answer

The market value of the inputs a firm uses in production

question

Explicit costs

answer

require an outlay of money
ex. paying wages to workers

question

implicit costs

answer

do not require a cash outlay,
e.g., the opportunity cost of the owner's time.

question

accounting profit

answer

total revenue minus total explicit cost

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

Which profit is bigger economic or accounting

answer

Accounting profit ignores implicit costs, so its higher than economic profit

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

Examples of production function

answer

Farmer Jack grows wheat.
He has 5 acres of land.
He can hire as many workers as he wants.

question

marginal product

answer

the increase in output arising from an additional unit of that input, holding all other inputs constant

question

marginal product of labor

answer

change in output / change in labor

question

Why is MPL important?

answer

Rational people think at the margin

question

diminishing marginal product

answer

the marginal product of an input declines as the quantity of the input increases

question

marginal cost

answer

the increase in total cost that arises from an extra unit of production

question

marginal cost formula

answer

MC = change in total cost / change in quantity

question

Fixed costs (FC)

answer

Do not vary with the quantity of output produced

Ex. Equipment, loans, rent

question

Variable costs (VC)

answer

vary with the quantity produced
ex: cost of materials

question

Total cost (TC) =

answer

FC + VC

question

When MC < ATC

answer

ATC is falling

question

When MC > ATC

answer

ATC is rising

question

The MC curve crosses the ATC curve at

answer

the ATC curve's minimum

question

Costs in the Short Run

answer

Some inputs are fixed (e.g., factories, land). The costs of these inputs are FC.

question

Costs in the Long Run

answer

all inputs are variable (firms can build more factories or sell existing ones)

question

economics of scale

answer

ATC falls as Q increases

question

Constant returns to scale

answer

ATC stays the same as Q increases

question

Diseconomics of Scale

answer

ATC rises as Q increases

1 of 30

question

The equilibrium rent on office space has just increased by $500/month. Determine the effects on accounting profit and economic profit if you rent your office space

answer

Both the accounting and economic profits would fall when renting your office space.

question

The equilibrium rent on office space has just increased by $500/month. Determine the effects on accounting profit and economic profit if you own your office space

answer

The economic profit would fall when owning your own office space due to implicit costs

question

What is the most competitive market structure

answer

Perfect competition

question

Profit =

answer

Total Revenue (TR) - Total Cost (TC)

question

Total revenue

answer

the amount a firm receives from the sale of its output

question

Total cost

answer

The market value of the inputs a firm uses in production

question

Explicit costs

answer

require an outlay of money
ex. paying wages to workers

question

implicit costs

answer

do not require a cash outlay,
e.g., the opportunity cost of the owner's time.

question

accounting profit

answer

total revenue minus total explicit cost

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

Which profit is bigger economic or accounting

answer

Accounting profit ignores implicit costs, so its higher than economic profit

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

Examples of production function

answer

Farmer Jack grows wheat.
He has 5 acres of land.
He can hire as many workers as he wants.

question

marginal product

answer

the increase in output arising from an additional unit of that input, holding all other inputs constant

question

marginal product of labor

answer

change in output / change in labor

question

Why is MPL important?

answer

Rational people think at the margin

question

diminishing marginal product

answer

the marginal product of an input declines as the quantity of the input increases

question

marginal cost

answer

the increase in total cost that arises from an extra unit of production

question

marginal cost formula

answer

MC = change in total cost / change in quantity

question

Fixed costs (FC)

answer

Do not vary with the quantity of output produced

Ex. Equipment, loans, rent

question

Variable costs (VC)

answer

vary with the quantity produced
ex: cost of materials

question

Total cost (TC) =

answer

FC + VC

question

When MC < ATC

answer

ATC is falling

question

When MC > ATC

answer

ATC is rising

question

The MC curve crosses the ATC curve at

answer

the ATC curve's minimum

question

Costs in the Short Run

answer

Some inputs are fixed (e.g., factories, land). The costs of these inputs are FC.

question

Costs in the Long Run

answer

all inputs are variable (firms can build more factories or sell existing ones)

question

economics of scale

answer

ATC falls as Q increases

question

Constant returns to scale

answer

ATC stays the same as Q increases

question

Diseconomics of Scale

answer

ATC rises as Q increases

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MICRO ECON EXAM 3

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