401 Midterm II Flashcards
What is Accounting Profit?
Accounting profit = revenue - expenses
What is Economic Profit?
Economic profit = revenue - (expenses + opportunity costs of time and financial capital)
Define Opportunity Cost
Opportunity cost refers to the potential benefits missed when choosing one alternative over another, such as investment returns or alternative uses of time.
Define Normal Return
Normal return is the return needed to compensate capital suppliers for investment risk.
What is Sunk Cost?
Sunk cost is an incurred expense that cannot be recovered and should not affect future decision-making.
Short Run vs. Long Run Costs
In the short run, some inputs are fixed (e.g., buildings, equipment); in the long run, all inputs become variable.
Define Fixed Cost
Fixed cost is a cost that remains constant regardless of output level, such as buildings and equipment.
Define Variable Cost
Variable cost changes with the level of production, including costs like labor, rented equipment, and energy.
What is Average Cost (AC)?
Average Cost (AC) = Total Cost (TC) / Output (Q)
What is Average Fixed Cost (AFC)?
Average Fixed Cost (AFC) = Fixed Cost / Output (Q)
What is Average Variable Cost (AVC)?
Average Variable Cost (AVC) = Variable Cost / Output (Q)
What is the Short-Run Marginal Cost (SMC) for labor at a wage of $20 and a marginal product of labor (MPL) of 0.5?
SMC = $40, as calculated by dividing the wage by the marginal product of labor.
Define Long-Run Average Cost (LAC)
LAC is the cost per unit of output when all inputs are variable in the long run.
Minimum Efficient Scale (MES)
MES is the lowest output level at which a firm can produce at the minimum long-run average cost.
Shut-Down Rule
In the short run, firms should continue if revenue > variable costs. In the long run, firms continue if expected profit is positive after fixed costs.
Short-Run Marginal Cost (SMC)
calculated by dividing the wage by the marginal product of labor.
Conditions for perfect competition
Large numbers of firms and consumers
No entry barriers (zero economic profit)
Identical products (allows for single price)
Firms and consumers are price takers (actions do not impact price)
Producer surplus equation
Price - marginal cost
Consumer surplus equation
WTP (marginal benefit) - market price
The Market for Driverless Cars will trend towards a monopoly
Waymo 3/330,000 vs 22/120,000
Argues more data will lead to better services at the top and huge barriers to entry, points to potential government pairing for public transport
Essentially an economy of scale
economists pin more blame on big tech:
Half of the increasing wage gap growth in the last 40 years was due to the automation of tasks
- Globalization weakens the role of unions
- by Acemoglu, who is one of the most widely cited economists in academic journals
Despite gridlock they are hoping to find common ground on some steps to help workers
There was a pre 1980’s phase where growing technology actually helped
Also cites the example of “so-so” tech: like self checkout stations and automated phone menus, stuff that does nothing but kill jobs without a real benefit
Long run market supply in constant cost and increasing cost industries
In a constant cost industry is a horizontal line
Increasing cost industry is upward sloping long run supply curve
Pareto efficiency
Pareto efficiency, also known as Pareto optimality, is an economic concept that describes a situation where resources are allocated in the most efficient way and no further improvements can be made to society’s well-being
Derive the optimal capital/labor ratio by writing down the slope of the isoquant and the isocost.
slope of the isoquant
slope of the isocost
write down the labor demand
schedule
at equilibrium of the labor market, what happens to wages
wages will equal worker’s marginal revenue
products of labor, which is the MPL * Price
Labor demand schedule graph with a price of 20
How is the optimal capital labor ratio devised?
By setting the isoquant and isocost equal to each other!
Given average cost (from a fixed cost and variable cost function) what are two ways to find minimized average cost?
1, where ẟAC = 0, and 2, where AC = MC
Given an MRTS of L / K = 6, what is the optimal ratio of labor to capital
We read this as 6 / 1 so 6 units labor to 1 capital
How do you analyze a firm’s viability in the short run vs the long run?
Short run is just rev - var costs at current q, long run is rev - AC at current q
How is MPL calculated without an equation (ie only values given)
Overall output / workers needed to get there; ie the amount produced per one more laborer at the value youre at
What formula derives the contribution to paying fixed costs that a revenue provides?
Q*(P-AVC)
Maximizing profit as a firm comes at
MC = MR!
