3.3.2 - Costs

Question 1

What Is The Economic Cost For A Firm?

Answer 1

Opportunity cost of production.

Question 2

What Is The Short Run (SR)?

Answer 2

When there is at least one fixed FOP.

Question 3

What Is The Long Run (LR)?

Answer 3

When all FOPs are variable.

Question 4

What Are Explicit Costs?

Answer 4

They require an actual payment.

Question 5

What Are Examples Of Explicit Costs?
(2 Points)

Answer 5

~ Fixed costs.

~ Variable costs.

Question 6

What Are Implicit Costs?

Answer 6

Opportunity cost, there is no physical payment.

Question 7

What Are Fixed Costs?

Answer 7

Costs that don’t vary with output.

Question 8

What Are Examples Of Fixed Costs?
(5 Points)

Answer 8

~ Rent.

~ Salaries.

~ Interest.

~ Loans.

~ Advertising.

Question 9

What Are Variable Costs?

Answer 9

Costs that do vary with output.

Question 10

What Are Examples Of Variable Costs?
(4 Points)

Answer 10

~ Wages.

~ Utility bills.

~ Raw material costs.

~ Transport costs.

Question 11

What Is Total Cost (TC) & Its Formula?
(3 Points)

Answer 11

~ Cost of producing a given level of output.

~ Fixed Costs (FC) + Variable Costs (VC).
Or
~ Total Fixed Costs (TFC) + Total Variable Costs (TVC).

Question 12

What Is The Formula For Total Variable Cost (TVC)?

Answer 12

Variable Cost (VC) x Quantity (Q).

Question 13

What Is The Formula For Total Fixed Cost (TFC)?
(2 Points)

Answer 13

~ Total Costs (TC) - Total Variable Costs (TVC).
Or
~ Average Fixed Cost (AFC) x Quantity (Q).

Question 14

What Is The Formula For Average Total Cost (ATC) Or Average Cost (AC)?
(2 Points)

Answer 14

~ Total Costs (TC) / Output (O).
Or
~ Average Variable Cost (AVC) + Average Fixed Cost (AFC).

Question 15

What Is The Formula For Average Fixed Cost (AFC)?
(2 Points)

Answer 15

~ Total Fixed Cost (TFC) / Quantity (Q).
Or
~ Average Cost (AC) - Average Variable Cost (AVC).

Question 16

What Is The Formula For Average Variable Cost (AVC)?
(2 Points)

Answer 16

~ Total Variable Cost (TVC) / Quantity (Q).
Or
~ Average Cost (AC) - Average Fixed Cost (AFC).

Question 17

What Is Marginal Cost (MC) & Its Formula?

Answer 17

~ Cost of producing one extra unit of output.

~ ∆ In Total Cost (TC) / ∆ In Quantity (Q).

Question 18

What Is The Law Of Diminishing Marginal Productivity / Returns?
(2 Points)

Answer 18

~ In the SR, when variable FOPs (Labour) are added to a stock of fixed FOPs, total / marginal product will initially rise and then fall.

~ There comes a point when each extra unit of the variable factor will produce less extra output than the previous unit.

Question 19

What Is Marginal Product (MP) & Its Formula?
(2 Points)

Answer 19

~ The change in output that results from adding an additional unit of labour.

~ ∆ In TP / ∆ In QL.

Question 20

Why Are Short Run AC Curves U-Shaped?

Answer 20

Because of the law of diminishing returns.

Question 21

Why Are Long Run Average Cost Curves U-Shaped?

Answer 21

Because of economies and diseconomies of scale.