7.4 Costs in the Short Run: Defining Short-Run Costs

Question 1

formula for Total Cost?

Answer 1

Total Cost= Total Fixed Cost + Total Variable Cost
TC = TFC + TVC

Question 2

formula for Average Total Cost?

Answer 2

Average Total Cost = Average Fixed Cost + Average Variable Cost
ATC = AFC + AVC
TC/Q = TFC/Q + TVC/Q

Question 3

define Marginal cost (MC)?

Answer 3

Marginal cost (MC) is the increase in total cost resulting from increasing output by one unit. Marginal costs are always marginal variable costs because fixed costs do not change as output varies. MC = ΔTC/ΔQ.

Question 4

What Is the Definition of Marginal Product of Labor?

Answer 4

The marginal product of labor (or MPL) refers to a company’s increase in total production when one additional unit of labor is added (in most cases, one additional employee) and all other factors of production remain constant

Question 5

When does AVC reach its minimum?

Answer 5

AVC is at its minimum when
AP reaches its maximum

Question 6

When does MC reach its minimum?

Answer 6

MC reaches its minimum when
MP reaches its maximum

Question 7

Define the capacity of a firm?

Answer 7

The level of output that corresponds to the minimum short-run average total cost is the capacity of the firm. Capacity is the largest output that can be produced without encountering rising average costs per unit.

Question 8

When does a firm have excess capacity?

Answer 8

A firm that is producing at an output less than the point of minimum average total cost is said to have excess capacity.

Question 9

What happens to the MC and ATC curves when there’s an increase in the price of a variable factor (ex: wage rate)?

Answer 9

ATC and MC shifts upward

Question 10

What happens to the MC and ATC curves when there’s an increase in the price of a fixed factor?

Answer 10

The ATC curve shifts upward but the MC curve does not change.