CHAPTER 10: Outputs & Costs

Question 1

Firm

Answer 1

institution that hires factors or production & organizes those factors to produce & sell goods & services

Question 2

The ultimate goal of firms is to….

Answer 2

maximize profit

Question 3

Depreciation describes a fall in the….

Answer 3

Value of a firms capital

Question 4

Economic profit

Answer 4

equal to total revenue minus total cost (total cost = opportunity cost of production)

Question 5

What is the opportunity cost of production?

Answer 5

value of the best alternative use of the resources that a firm uses in production

Question 6

Describe the opportunity cost of production for resources bought in the market

Answer 6

firm could have bought different resources to produce some other good/service
E.g. Campus Sweaters bought wool, utilities, labour, leased a computer, & a bank loan in the market
Spent $230,000 on these items which could’ve been used on something else

Question 7

Describe the opportunity cost of production for resources owned by the firm

Answer 7

firm could sell the capital it owns & rent capital from another firm

Implicit Rental Rate - opportunity cost of using the capital one owns

Economic Depreciation - fall in the market value of a firms capital over a given period

Forgone Interest - funds used to buy capital could’ve been used to earn interest

Question 8

Describe the opportunity cost of production for resources supplied by the firm owner

Answer 8

○ Entrepreneurship - factor of production that organizes a firm & makes decisions that might be supplied by firms owner or a hired CEO

Normal profit - profit that an entrepreneur earns on average
□ Cost of entrepreneurship & production

○ Owner may supply labour but not take a wage - opportunity cost is the wage income forgone

Question 9

What is a profit prospect?

Answer 9

expectation that total revenue will exceed total cost

Question 10

Describe the short run decision timeframe

Answer 10

Short Run - quantity of at least one factor of production is fixed
E.g. capital, land, & entrepreneurship is fixed; labour is variable
Increase output by increasing the quantity of the variable factor (labour)
easily reversible - can be increased or decreased

Question 11

Describe the long run decision timeframe

Answer 11

Long-Run - quantities of all factors of production can be varied
Firm changes its plant (fixed variables), along w/ quantity of variable (labour)
Not easily reversed; firm sticks with decisions for some time
can led to sunk cost - past expenditure on a plant that has no resale value

Question 12

Fixed factors (e.g. capital, land, & entrepreneurship) are considered the

Answer 12

firm plant

Question 13

Total Product

Answer 13

max output that a given quantity of labour can produce
○ E.g. as a company employs more labours, total product increases
○ E.g. 1 worker employed, total product = 4 sweaters/day; 2 workers employed, total product = 10 sweaters/day

Question 14

Marginal Product

Answer 14

increase in total product that results from a one-unit increase in the quantity of labour employed (all other inputs remain the same

E.g. employment increase from 2 to 3 workers, marginal product of the 3rd worker is 3 sweaters; total product increases from 10 to 13

Question 15

Average Product

Answer 15

how productive workers are on average
Total product divided by the quantity of labour employed
E.g. average product of 3 workers = 4.33 sweaters/worker; 13 sweaters a day divided by 3 workers

Question 16

According to total product curve, as employment increases, the curve becomes ______.
As employment decreases, curve becomes ____

Answer 16

1. steep
2. less steep

Question 17

Points that are below & on the total product curve are_____.

Answer 17

Below - attainable & inefficient; use more labour than necessary to produce a given output
On the Curve - attainable & efficient

Question 18

RECALL: how do we measure the slope of a curve?

Answer 18

change in the value of the variable measured on the y-axis (output) divided by the change in the variable measured on the x-axis (labour)

Question 19

How do we measure marginal product?

Answer 19

slope of curve

Question 20

The shape of two product curves may be similar even though total & marginal product differ. Why?

Answer 20

1) Increasing Marginal Return - marginal product of an additional worker exceeds marginal product of the previous worker
- Occurs when there is increased specialization & division of labour
- E.g. Campus sweaters hires a 2nd worker allowing 2 workers to specialize in different tasks & produce more than 1 worker alone

2) Diminishing Marginal Return - marginal product of an additional worker is less than the marginal product of the previous worker
- Arises from the fact that more workers are using the same capital & working in the same space - less productive work

Question 21

The law of diminishing returns states that as a firm_________.

Answer 21

uses more of a variable factor of production w/ a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes

Question 22

When is average product the largest?

Answer 22

when avg product & marginal product are equal

Question 23

For the # of workers at which marginal product > avg product ______

Answer 23

avg product increasing

Question 24

Average product decreases when ______

Answer 24

the # of workers at which marginal product < avg product

Question 25

Total Cost (TC = TFC +TVC)

Answer 25

(TC) - cost of all factors of production

Total Fixed Cost (TFC) - cost of fixed factors (same across all outputs)

Total Variable Cost (TVC) - cost of variable factors

Question 26

marginal cost

Answer 26

increase in total cost that results from a one-unit increase in output

Question 27

At small outputs, marginal cost decreases as____

Answer 27

output increases because of greater specialization & division of labour

Question 28

What are the 3 types of average cost?

Answer 28

○ Average Fixed Cost (AFC) - total fixed cost per unit of output
○ Average Variable Cost (AVC) - total variable cost per unit of output
○ Average Total Cost (ATC) - total cost per unit of output

Question 29

When marginal cost is < avg cost…..

Answer 29

avg cost decreasing

Question 30

When Marginal cost > avg cost……

Answer 30

avg cost increasing

Question 31

Firms achieve technological efficiency when ______

Answer 31

they produce output with the fewest inputs possible given the available technology

Economic efficiency occurs when firms produce output at the lowest possible cost.

Question 32

Total product curve shows

Answer 32

output & different quantities of input

Question 33

Average total cost is the sum of

Answer 33

AFC & AVC

Question 34

Why is the ATC curve u-shaped?

Answer 34

1) Spreading total fixed cost over a larger output
2) Eventually diminishing returns

When firm increases output, its TFC is spread over a larger output so AFC decreases - AFC curve slopes downwards

As output increases, AVC decreases initially but eventually increases & AVC curves slopes upwards - U-shaped

Question 35

For each short-run ATC curve, the larger the plant_________

Answer 35

greater the output at which average total cost is at a minimum

Question 36

The position of a firms short-run cost curve depends on what 2 factors?

Answer 36

Technology - change that increases productivity increases the marginal product & average product of labour

Prices of Factors of Production:

Increase in rent/fixed costs - shifts TFC & AFC curve upwards & shifts TC curve upwards
□ Leaves AVC & TVC & MC curves unchanged

Increase in variable costs (wages, gas, etc.) - TVC, AVC & MC shift upwards
□ AFC & TFC unchanged

Question 37

What is long-run cost?

Answer 37

Firm can vary both the quantity of labour & quantity of capital, so in the long-run all the firms cost are variable

Question 38

Behaviour of long-run cost depends on the firms____

Answer 38

production function - relationship between the maximum output attainable & the quantities of labour & capital

Question 39

Marginal product of capital

Answer 39

change in total product divided by the change in capital when the quantity of labour is constant
Change in output from 1 unit increase in quantity of capital

Question 40

When a firm is producing output at the least possible cost, it is operating on its

Answer 40

long-run average cost curve - Relationship between the lowest attainable average total cost & output when the firm can change both the plant it uses & the quantity of labour it employs

Question 41

What is the differences between economies & diseconomies of scale?

Answer 41

• Economies of Scale - features of tech that make avg total cost fall as output increases
  ○ LRAC curve slopes downwards
  ○ Results from greater specialization of labour & capital
• Diseconomies of Scale - features of tech that make ATC rise as output increases
  ○ LRAC slopes upwards
  ○ Results from challenges of managing a large enterprise

Question 42

Constant return to scale is____

Answer 42

features of a firms tech that keep ATC constant as output increases
LRAC - horizontal

Question 43

Minimum efficient scale

Answer 43

smallest output at which long-run avg cost reaches lowest level

Question 44

Market where minimum efficient scale is small relative to market demand

Answer 44

market has room for many firms & is competitive

Question 45

Market where minimum efficient scale is large relative to market demand

Answer 45

small # of firms (possibly 1) that can make profit & market is either oligopoly & monopoly