3.3.2 - Costs

Question 1

Short-run costs

Answer 1

at least 1 factor of production is fixed

Question 2

Long-run costs

Answer 2

a period where firms can alter their scale of industry (increase or decrease) so all the factors of production become variable

Question 3

Total costs equation

Answer 3

Total cost = fixed costs + variable costs
TC = FC + VC

Question 4

Average total cost equation

Answer 4

Average total cost = total cost ÷ output (AC = TC÷Q)

Question 5

Fixed costs definition

Answer 5

don’t vary with output, only in SR.

Question 6

Average fixed costs equation

Answer 6

average fixed costs = total fixed costs ÷ output
(AFC = TFC÷Q)

Question 7

Variable costs definition

Answer 7

vary with output, SR and LR.

Question 8

Average variable costs equation

Answer 8

average variable costs = total variable costs ÷ output
(AVC = TVC÷Q)

Question 9

Marginal costs definition

Answer 9

result in costs of producing one extra unit of output

Question 10

Effect of MC decreasing

Answer 10

even if MC decreases, TC will still be increasing as long as MC is positive (can’t sell for a negative price)

Question 11

Marginal cost equation

Answer 11

Marginal cost = change in total cost ÷ change in output
MC = ∆TC ÷ ∆Q