Production and Cost - Custom Scholars
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# Production and Cost

question
one way to increase profits is to increase
revenues
question
one way to increase profits is to reduce
the costs of production
question
economic cost
the payment that must be made to obtain and retain the services of a resource, the income provided to resource owners, opportunity cost of using a resource
question
explicit cost
the monetary payments a firm makes to those form whom it must purchase resources that it does not own
question
implicit costs
the opportunity cost of using the resource that the firm already owns
question
economic costs equation
EC=EXC+IXC
question
accounting profits
the difference between total revenue and explicit costs
question
accounting profit equation
AP=TR-EXC
question
economic profit
the difference between total revenue and economic costs
question
economic profit equation
EP=TR-EC(economic costs)
question
¡Kim was a manager for XYZ Inc. where she earned a salary of \$60,000 per year. Kim decided to open a new business and, like many small business owners, decided not to pay herself a salary. At the end of the year Kim's business had earned total revenue of \$100,000 with \$50,000 of explicit costs.
Accounting Profits = 100,000 - 50,000
= \$50,000

Economic Profits = 100,000 -110,000
= -\$10,000
question
one important implicit cost that must be included in the calculation of economic profits is
normal profit
question
normal profit
the typical amount of accounting profit that you would most likely have earned in an alternative venture, minimum profit for a firm to earn if it is to stay in business in the long run
question
if a firm has \$0 economic profit then
the entrepreneurs knows that they are doing exactly as well as they could expect to earn in other business ventures
question
a positive economic profit means
that the business is doing better than other they could in alternative ventures and they will expand
question
a negative economic profit means
that the business is not doing as well as some alternative and the entrepreneur would be better off switching to something else
question
short run
deals with the day to day operating decisions made by the firm
question
long run
focuses on the strategic decisions that affect the firms capabilities in the future
question
short run period
a period of time over which one or more factors of production are considered fixed in quantity
question
the long run period
defined as a period of time over which a firm can consider all factors of production as variable
question
production function
The relationship between factors of production and the output of a firm.
shows the maximum amount of a good that can be produced with various combinations of inputs and a given technology
question
total product
the quantities of output that can be obtained from different amounts of a variable factor of production, assuming other factors of production are fixed
question
productivity
is measured by the average product of the workers, output per unit of input
question
average product
is calculated by dividing the total product by the quantity of workers being used to make it
question
average product equaiton
AP=TP/Q of workers
question
marginal product
question
marginal product equation
MP=ChangeTP/Change Quantity of workers
question
law of diminishing returns
all else equal, as additional unites of a variable input are added to fixed inputs we will reach a point where each additional input adds less output to the total than the last
question
true or false: since the law of diminishing returns depends on the presence of fixed inputs, it is only true in the short run
true
question
fixed costs
do not change as the level of output changes
question
variable costs
increase as the level of production increases
question
total cost equation
TC=TFC+TVC
question
average total cost equation
ATC=TC/Q
question
Average fixed cost equation
AFC=TFC/Q
question
Average variable cost equation
ATC=AFC+AVC
question
what does the curve look like for ATC
u shaped
question
what does the lowest point on the ATC curve represent
the lowest cost or most efficient level of output
question
what will always get smaller as production rises
AFC
question
as production increase AFC goes towards
zero
question
what does the shape of the curve look like for AVC
u shaped
question
as production rises, ATC and AVC will get
closer together
question
do variable costs of production become more important as production rises?
yes
question
Marginal cost
the cost of producing an additional unit of output
question
Marginal cost equation
MC=changeTC/ChangeQ
question
what kind of curve is the MC
u shaped
question
relationship between MC and AVC and ATC
AVC is at its minimum when the MC cuts it from below and the ATC is at its minimum when the MC cuts it from below
question
long run average cost curve
found by drawing an envelope curve that is just tangent to each of the short run cost curve options
question
economics of scale
exist when a given percentage increase in all input leads to a greater percentage increase in the firms output
question
diseconomics of scale
exist when a given percentage increase in all inputs leads to a small percentage increase in the firms output
question
constant returns to scale
means the a given percentage increase in all inputs leads to an equal percentage increase in the firms output
question
when there are economics of scale, LRAC is
downward sloping
question
When there are diseconomics of scale, the LRAC is
is upward sloping
question
constant returns give a
horizational LRAC
question
economies of scale arise from things that raise productivity like
specialization, mass production, and more productive equipment
question
major source of diseconomies is
dificulites associated with the sheer size of a large company
question
minimum efficient scale
the smallest the firm can be and still operate a minimum cost in the long run
question
When MES is small
there will be a large number of small firms
question
when MES is large
there will be a small number of large firms
question
increasing marginal returns
a characterisitc of production where by the marginal product of the next unit of a varibale resource utilized is greater than that of the previous variable resource
question
If MC > ATC
ATC increases
question
if MC> AVC
AVC increases
question
if MC< ATC
ATC decreases
question
if MC< AVC
AVC decreases
question
if MC= ATC
ATC remains unchanged
question
if MC= AVC
AVC remains unchanged
question
short run average cost curve
a curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity
1 of 66
question
one way to increase profits is to increase
revenues
question
one way to increase profits is to reduce
the costs of production
question
economic cost
the payment that must be made to obtain and retain the services of a resource, the income provided to resource owners, opportunity cost of using a resource
question
explicit cost
the monetary payments a firm makes to those form whom it must purchase resources that it does not own
question
implicit costs
the opportunity cost of using the resource that the firm already owns
question
economic costs equation
EC=EXC+IXC
question
accounting profits
the difference between total revenue and explicit costs
question
accounting profit equation
AP=TR-EXC
question
economic profit
the difference between total revenue and economic costs
question
economic profit equation
EP=TR-EC(economic costs)
question
¡Kim was a manager for XYZ Inc. where she earned a salary of \$60,000 per year. Kim decided to open a new business and, like many small business owners, decided not to pay herself a salary. At the end of the year Kim's business had earned total revenue of \$100,000 with \$50,000 of explicit costs.
Accounting Profits = 100,000 - 50,000
= \$50,000

Economic Profits = 100,000 -110,000
= -\$10,000
question
one important implicit cost that must be included in the calculation of economic profits is
normal profit
question
normal profit
the typical amount of accounting profit that you would most likely have earned in an alternative venture, minimum profit for a firm to earn if it is to stay in business in the long run
question
if a firm has \$0 economic profit then
the entrepreneurs knows that they are doing exactly as well as they could expect to earn in other business ventures
question
a positive economic profit means
that the business is doing better than other they could in alternative ventures and they will expand
question
a negative economic profit means
that the business is not doing as well as some alternative and the entrepreneur would be better off switching to something else
question
short run
deals with the day to day operating decisions made by the firm
question
long run
focuses on the strategic decisions that affect the firms capabilities in the future
question
short run period
a period of time over which one or more factors of production are considered fixed in quantity
question
the long run period
defined as a period of time over which a firm can consider all factors of production as variable
question
production function
The relationship between factors of production and the output of a firm.
shows the maximum amount of a good that can be produced with various combinations of inputs and a given technology
question
total product
the quantities of output that can be obtained from different amounts of a variable factor of production, assuming other factors of production are fixed
question
productivity
is measured by the average product of the workers, output per unit of input
question
average product
is calculated by dividing the total product by the quantity of workers being used to make it
question
average product equaiton
AP=TP/Q of workers
question
marginal product
question
marginal product equation
MP=ChangeTP/Change Quantity of workers
question
law of diminishing returns
all else equal, as additional unites of a variable input are added to fixed inputs we will reach a point where each additional input adds less output to the total than the last
question
true or false: since the law of diminishing returns depends on the presence of fixed inputs, it is only true in the short run
true
question
fixed costs
do not change as the level of output changes
question
variable costs
increase as the level of production increases
question
total cost equation
TC=TFC+TVC
question
average total cost equation
ATC=TC/Q
question
Average fixed cost equation
AFC=TFC/Q
question
Average variable cost equation
ATC=AFC+AVC
question
what does the curve look like for ATC
u shaped
question
what does the lowest point on the ATC curve represent
the lowest cost or most efficient level of output
question
what will always get smaller as production rises
AFC
question
as production increase AFC goes towards
zero
question
what does the shape of the curve look like for AVC
u shaped
question
as production rises, ATC and AVC will get
closer together
question
do variable costs of production become more important as production rises?
yes
question
Marginal cost
the cost of producing an additional unit of output
question
Marginal cost equation
MC=changeTC/ChangeQ
question
what kind of curve is the MC
u shaped
question
relationship between MC and AVC and ATC
AVC is at its minimum when the MC cuts it from below and the ATC is at its minimum when the MC cuts it from below
question
long run average cost curve
found by drawing an envelope curve that is just tangent to each of the short run cost curve options
question
economics of scale
exist when a given percentage increase in all input leads to a greater percentage increase in the firms output
question
diseconomics of scale
exist when a given percentage increase in all inputs leads to a small percentage increase in the firms output
question
constant returns to scale
means the a given percentage increase in all inputs leads to an equal percentage increase in the firms output
question
when there are economics of scale, LRAC is
downward sloping
question
When there are diseconomics of scale, the LRAC is
is upward sloping
question
constant returns give a
horizational LRAC
question
economies of scale arise from things that raise productivity like
specialization, mass production, and more productive equipment
question
major source of diseconomies is
dificulites associated with the sheer size of a large company
question
minimum efficient scale
the smallest the firm can be and still operate a minimum cost in the long run
question
When MES is small
there will be a large number of small firms
question
when MES is large
there will be a small number of large firms
question
increasing marginal returns
a characterisitc of production where by the marginal product of the next unit of a varibale resource utilized is greater than that of the previous variable resource
question
If MC > ATC
ATC increases
question
if MC> AVC
AVC increases
question
if MC< ATC
ATC decreases
question
if MC< AVC
AVC decreases
question
if MC= ATC
ATC remains unchanged
question
if MC= AVC
AVC remains unchanged
question
short run average cost curve
a curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity

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