Chapter 10: Cost and Industry Structure

Question 1

Firm/Business

Answer 1

Combines inputs of labor, capital, land, and component materials to produce outputs

Question 2

Production

Answer 2

Any process or service that creates value, including manufacturing, transportation, distribution, wholesale, and retail

Question 3

Perfect Competition

Answer 3

Many firms, identical product

Question 4

Monopolistic Competition

Answer 4

Many firms, similar but not identical products

Question 5

Oligopoly

Answer 5

Few firms, identical or similar products

Question 6

Monopoly

Answer 6

One firm, no competition

Question 7

Private Enterprise

Answer 7

Ownership of businesses by private individuals

Question 8

Total Revenue (equation)

Answer 8

Price x Quantity of Output = Total Revenue

Question 9

Explicit Costs

Answer 9

Payments actually made, out-of-pocket costs

Question 10

Implicit Costs

Answer 10

Opportunity cost of using resources already owned by the firm (owner working for no salary, home used as a workplace, depreciation, etc)

Question 11

Accounting Profit

Answer 11

Total Revenue - Explicit Costs

Question 12

Economic Profit

Answer 12

Total Revenue - Explicit Costs - Implicit Costs

Question 13

Fixed Costs

Answer 13

Expenditures that do not change regardless of the level of production (rent)

Question 14

Variable Costs

Answer 14

Incurred in the act of producing (labor, raw materials, etc)

Question 15

Diminishing Marginal Returns

Answer 15

Total costs of production begin to rise more rapidly as output increases

Question 16

Average Total Cost

Answer 16

Total cost divided by the quantity of output

Question 17

Marginal Cost

Answer 17

Additional cost of producing one more unit of output. Calculated by change in total cost divided by change in quantity

Question 18

Average Variable Cost

Answer 18

Variable cost divided by quantity of output

Question 19

Sunk Costs

Answer 19

Fixed costs that cannot be recouped

Question 20

Average Profit

Answer 20

Profit divided by quantity of output produced

Question 21

Approximate number of workers at a “large” firm

Answer 21

500

Question 22

Approximate percentage of the American workforce that works at “large” sized firms

Answer 22

50% / Half

Question 23

Approximate percentage of the American workforce that works at firms with 100 workers or less

Answer 23

35% / One Third

Question 24

What is the economic concept behind big box warehouse stores, like Costco and Walmart?

Answer 24

Economies of Scale:

as quantity of output goes up, cost per unit goes down

Question 25

LRAC Curve

Long Run Average Cost Curve

Answer 25

Based on a group of short-run average cost curves, each of which represents one specific level of fixed costs

Question 26

Diseconomies of Scale

Answer 26

Occurs when a firm grows so large that the costs per unit increase (related to diminishing marginal returns)

Question 27

Constant Returns to Scale

Answer 27

Occurs when allowing all inputs to expand does not much change the average cost of production

Question 28

Can a firm experience Economy of Scale and diminishing marginal returns at the same time?

Answer 28

Yes. DMR refers to the short-run average cost curve in relation to increase of a single variable, and EOS refers to long-run average cost curve where all inputs are increasing.

Question 29

What is an example of “diseconomy” effects of living in urban areas? (in other words, as the input of population grows, the negative effects)

Answer 29

Traffic congestion
Overcrowded facilities
Pollution from high density

Question 30

If the LRAC (Long Run Average Cost) curve has a single point at the bottom, what does this say about firms in the market?

Answer 30

Competing firms will be about the same size

Question 31

If the LRAC (Long Run Average Cost) curve has a flat-bottomed segment of constant returns to scale, what does this say about firms in the market?

Answer 31

Competing firms may be a variety of sizes

Question 32

Does technology always increase the advantage of larger firms, or lead to a greater average size of firms?

Answer 32

Not necessarily. This was the case for much of the 20th century. New technologies make make it easier for small firms to reach beyond their local geographic area, but it also could create “winner take all” markets such as Microsoft or Amazon.

Question 33

Long Run

Answer 33

Time period in which all costs/inputs are variable (for example, the long run is over a year away when the fixed cost of your lease is up so you can change this input)