Production and Cost

question

one way to increase profits is to increase

answer

revenues

question

one way to increase profits is to reduce

answer

the costs of production

question

economic cost

answer

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

answer

the monetary payments a firm makes to those form whom it must purchase resources that it does not own

question

implicit costs

answer

the opportunity cost of using the resource that the firm already owns

question

economic costs equation

answer

EC=EXC+IXC

question

accounting profits

answer

the difference between total revenue and explicit costs

question

accounting profit equation

answer

AP=TR-EXC

question

economic profit

answer

the difference between total revenue and economic costs

question

economic profit equation

answer

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.

answer

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

answer

normal profit

question

normal profit

answer

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

answer

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

answer

that the business is doing better than other they could in alternative ventures and they will expand

question

a negative economic profit means

answer

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

answer

deals with the day to day operating decisions made by the firm

question

long run

answer

focuses on the strategic decisions that affect the firms capabilities in the future

question

short run period

answer

a period of time over which one or more factors of production are considered fixed in quantity

question

the long run period

answer

defined as a period of time over which a firm can consider all factors of production as variable

question

production function

answer

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

answer

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

answer

is measured by the average product of the workers, output per unit of input

question

average product

answer

is calculated by dividing the total product by the quantity of workers being used to make it

question

average product equaiton

answer

AP=TP/Q of workers

question

marginal product

answer

measures the additional outputs that can be produced using additional inputs

question

marginal product equation

answer

MP=ChangeTP/Change Quantity of workers

question

law of diminishing returns

answer

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

answer

true

question

fixed costs

answer

do not change as the level of output changes

question

variable costs

answer

increase as the level of production increases

question

total cost equation

answer

TC=TFC+TVC

question

average total cost equation

answer

ATC=TC/Q

question

Average fixed cost equation

answer

AFC=TFC/Q

question

Average variable cost equation

answer

ATC=AFC+AVC

question

what does the curve look like for ATC

answer

u shaped

question

what does the lowest point on the ATC curve represent

answer

the lowest cost or most efficient level of output

question

what will always get smaller as production rises

answer

AFC

question

as production increase AFC goes towards

answer

zero

question

what does the shape of the curve look like for AVC

answer

u shaped

question

as production rises, ATC and AVC will get

answer

closer together

question

do variable costs of production become more important as production rises?

answer

yes

question

Marginal cost

answer

the cost of producing an additional unit of output

question

Marginal cost equation

answer

MC=changeTC/ChangeQ

question

what kind of curve is the MC

answer

u shaped

question

relationship between MC and AVC and ATC

answer

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

answer

found by drawing an envelope curve that is just tangent to each of the short run cost curve options

question

economics of scale

answer

exist when a given percentage increase in all input leads to a greater percentage increase in the firms output

question

diseconomics of scale

answer

exist when a given percentage increase in all inputs leads to a small percentage increase in the firms output

question

constant returns to scale

answer

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

answer

downward sloping

question

When there are diseconomics of scale, the LRAC is

answer

is upward sloping

question

constant returns give a

answer

horizational LRAC

question

economies of scale arise from things that raise productivity like

answer

specialization, mass production, and more productive equipment

question

major source of diseconomies is

answer

dificulites associated with the sheer size of a large company

question

minimum efficient scale

answer

the smallest the firm can be and still operate a minimum cost in the long run

question

When MES is small

answer

there will be a large number of small firms

question

when MES is large

answer

there will be a small number of large firms

question

increasing marginal returns

answer

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

answer

ATC increases

question

if MC> AVC

answer

AVC increases

question

if MC< ATC

answer

ATC decreases

question

if MC< AVC

answer

AVC decreases

question

if MC= ATC

answer

ATC remains unchanged

question

if MC= AVC

answer

AVC remains unchanged

question

short run average cost curve

answer

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

answer

revenues

question

one way to increase profits is to reduce

answer

the costs of production

question

economic cost

answer

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

answer

the monetary payments a firm makes to those form whom it must purchase resources that it does not own

question

implicit costs

answer

the opportunity cost of using the resource that the firm already owns

question

economic costs equation

answer

EC=EXC+IXC

question

accounting profits

answer

the difference between total revenue and explicit costs

question

accounting profit equation

answer

AP=TR-EXC

question

economic profit

answer

the difference between total revenue and economic costs

question

economic profit equation

answer

EP=TR-EC(economic costs)

question

answer

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

answer

normal profit

question

normal profit

answer

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

answer

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

answer

that the business is doing better than other they could in alternative ventures and they will expand

question

a negative economic profit means

answer

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

answer

deals with the day to day operating decisions made by the firm

question

long run

answer

focuses on the strategic decisions that affect the firms capabilities in the future

question

short run period

answer

a period of time over which one or more factors of production are considered fixed in quantity

question

the long run period

answer

defined as a period of time over which a firm can consider all factors of production as variable

question

production function

answer

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

answer

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

answer

is measured by the average product of the workers, output per unit of input

question

average product

answer

is calculated by dividing the total product by the quantity of workers being used to make it

question

average product equaiton

answer

AP=TP/Q of workers

question

marginal product

answer

measures the additional outputs that can be produced using additional inputs

question

marginal product equation

answer

MP=ChangeTP/Change Quantity of workers

question

law of diminishing returns

answer

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

answer

true

question

fixed costs

answer

do not change as the level of output changes

question

variable costs

answer

increase as the level of production increases

question

total cost equation

answer

TC=TFC+TVC

question

average total cost equation

answer

ATC=TC/Q

question

Average fixed cost equation

answer

AFC=TFC/Q

question

Average variable cost equation

answer

ATC=AFC+AVC

question

what does the curve look like for ATC

answer

u shaped

question

what does the lowest point on the ATC curve represent

answer

the lowest cost or most efficient level of output

question

what will always get smaller as production rises

answer

AFC

question

as production increase AFC goes towards

answer

zero

question

what does the shape of the curve look like for AVC

answer

u shaped

question

as production rises, ATC and AVC will get

answer

closer together

question

do variable costs of production become more important as production rises?

answer

yes

question

Marginal cost

answer

the cost of producing an additional unit of output

question

Marginal cost equation

answer

MC=changeTC/ChangeQ

question

what kind of curve is the MC

answer

u shaped

question

relationship between MC and AVC and ATC

answer

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

answer

found by drawing an envelope curve that is just tangent to each of the short run cost curve options

question

economics of scale

answer

exist when a given percentage increase in all input leads to a greater percentage increase in the firms output

question

diseconomics of scale

answer

exist when a given percentage increase in all inputs leads to a small percentage increase in the firms output

question

constant returns to scale

answer

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

answer

downward sloping

question

When there are diseconomics of scale, the LRAC is

answer

is upward sloping

question

constant returns give a

answer

horizational LRAC

question

economies of scale arise from things that raise productivity like

answer

specialization, mass production, and more productive equipment

question

major source of diseconomies is

answer

dificulites associated with the sheer size of a large company

question

minimum efficient scale

answer

the smallest the firm can be and still operate a minimum cost in the long run

question

When MES is small

answer

there will be a large number of small firms

question

when MES is large

answer

there will be a small number of large firms

question

increasing marginal returns

answer

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

answer

ATC increases

question

if MC> AVC

answer

AVC increases

question

if MC< ATC

answer

ATC decreases

question

if MC< AVC

answer

AVC decreases

question

if MC= ATC

answer

ATC remains unchanged

question

if MC= AVC

answer

AVC remains unchanged

question

short run average cost curve

answer

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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