6.2 Cost Theory

Question 1

formala for total cost

Answer 1

fixed + variable costs

Question 2

define marginal cost

Answer 2

increase in total cost caused by an extra unit of production

Question 3

formula for MC

Answer 3

change in total variable cost / change in quantity

Question 4

why is marginal cost u shaped

Answer 4

goes down then up

corresponds to marginal revenue (diminishing marginal returns)

Question 5

how to work out average …

Answer 5

…./ quantity

Question 6

what does ATC show compared to MC

Answer 6

ATC shows cost of typical unit of output if cost is divided evenly over all units produced, where Marginal cost= increase in total cost from producing an additional unit of output)

Question 7

what are the three features of cost curves

Answer 7

1. MC with quantity of output, 2. ATC curve= U shaped, 3. MC crosses other two at min

Question 8

link between cost curve and product curve

Answer 8

• Decrease in marginal costs= increase in marginal returns,
  ♣ (and increase costs with diminishing marginal returns)
• Due to:
  ♣ Initially, as each successive worker adds more to output than the previous worker (MP increases), then the cost of this worker (w) is spread over more and more units of output = hence decrease MC
  ♣ Once diminishing returns set in, each worker is adding less and less to output (MP diminishes) and the wage is spread over fewer units of output (MC increases)

Question 9

define long run average cost

Answer 9

LAC

Indicates the lowest average cost of production at each rate of output when the firm’s size is allowed to vary

Question 10

what does the minimum point on a LAC curve show

Answer 10

minimum efficient scale: minimises average costs

Question 11

what are economies of scale

Answer 11

forces causing decrease in average cost as scale of operation increase in long run