Chapter 4- Costs of Production

Question 0

define: sole proprietorship

Answer 0

an unincorporated business that is owned by a single person

Question 1

Define:business

Answer 1

an enterprise that brings individuals, financial resources, and economic resources together to produce a good/service for economic gain

Question 2

define: partnership

Answer 2

unincorporated business that is owned by 2 or more people

Question 3

both sole proprietorships and partnerships are subject to…?

Answer 3

unlimited liability

Question 4

what is unlimited liability?

Answer 4

the owner and partners are responsible for the company’s obligations (personal belongings can be seized for payment of debt)

Question 5

define: corporation

Answer 5

a company that has legal status independent of its owners (ownership gained through buying shares)

Question 6

corporate shareholders enjoy the advantage of…?

Answer 6

limited liability

Question 7

what is limited liability

Answer 7

one can only lose what they put into corporation

Question 8

define: production

Answer 8

the process of transforming a set of resources into a good or service that has the economic value

Question 9

define: inputs

Answer 9

the resources used in production (natural, capital, and human)

Question 10

define: output

Answer 10

the result of production (the quantity of a good/service produced)

Question 11

what are the 3 main sectors in the economy

Answer 11

primary, secondary, service

Question 12

what is the primary sector

Answer 12

consists of industries that extract or cultivate natural resources

Question 13

what is the secondary sector

Answer 13

consists of industries that fabricate or process goods

Question 14

what is the service sector

Answer 14

consists of trade and information industries

Question 15

Normal profit is the expected return for…?

Answer 15

supplying entrepreneurial ability

Question 16

How is economic profit calculated?

Answer 16

revenue minus economic costs

Question 17

opportunity cost is greater than…?

Answer 17

accounting cost

Question 18

economic profit is less than…?

Answer 18

accounting profit

Question 19

a profit maximizing firm is constrained by:

Answer 19

1. demand for its product
2. limited resources
3. available technology
4. limited information

Question 20

In the short run what are the inputs?

Answer 20

“fixed inputs” (like capital) and “variable inputs” (like labour)

Question 21

What is average product?

Answer 21

the quantity of output produced per worker

Question 22

How is average product calculated?

Answer 22

total product divided by # of workers

Question 23

What is marginal product?

Answer 23

the extra output produced by an additional worker

Question 24

how is marginal product calculated?

Answer 24

change in total product divided by the change in the amount of labour employed

Question 25

What is the Law of Diminishing Marginal Returns?

Answer 25

at some point, as more units if a variable input are added to a fixed input, the marginal product will start to decrease

Question 26

How is short-run production determined by the law of diminishing marginal returns

Answer 26

1. the addition of more variable input causes marginal product to fall after some point 2. average product also falls after some point

Question 27

What are the three rules of the relation of average and marginal values?

Answer 27

1. if an average value rises then the marginal value must be above the average value 2. if an average value falls then the marginal value must be below the average value 3. if an average value stays constant then the marginal value must equal the average value

Question 28

What are fixed costs

Answer 28

costs that don't change when a business changes its quantity of output, since these costs relate to fixed inputs

Question 29

what are variable costs

Answer 29

costs that relate to variable inputs which do change when a company adjusts the quantity produced

Question 30

what are total costs

Answer 30

all fixed costs and all variable costs put together

Question 31

What is the marginal cost

Answer 31

the extra cost of producing an additional unit of output

Question 32

how is marginal cost calculated

Answer 32

change in total cost divided by the change in total product

Question 33

why is the marginal cost curve shaped like a J

Answer 33

because of the law of diminishing marginal returns

Question 34

what is the average fixed cost

Answer 34

the fixed cost per unit of output

Question 35

how is AFC calculated

Answer 35

fixed cost divided by total product

Question 36

what is the average variable cost

Answer 36

the variable cost per unit of output

Question 37

how is AVC calculated

Answer 37

variable costs divided by total product

Question 38

what is the average cost

Answer 38

the sum of AFC and AVC at each quantity of output

Question 39

how is AC calculated

Answer 39

AFC + AVC OR TC / Q

Question 40

When are all outputs variable?

Answer 40

in the long run

Question 41

Describe: increasing returns to scale

Answer 41

- caused by the division of labour or specialized capital or specialized management - it's a situation in which a percent increase in all inputs causes a larger increase in output - the percent change in output > the percent change in inputs - virtually all businesses experience increasing returns to scale over the initial range of output

Question 42

Describe: constant returns to scale

Answer 42

- constant returns to scale arise whenever making more of a product means repeating exactly the same tasks - its a situation in which a percentage increase in all inputs results in an equal percentage increase in output - the percent change in output equal the percent change in inputs - if you double the input you double the output

Question 43

Describe: decreasing returns to scale

Answer 43

- decreasing return to scale are caused by management difficulties or limited natural resources - its a situation in which a percent change in all inputs causes a smaller percent increase in output - percent change in output < the percent change in inputs - thus if you expand inputs by 100% your outputs would only expand by 75%

Question 44

long - run average cost is:

Answer 44

the minimum short-run average cost at every output

Question 45

the reasons for the long-run average cost curve to be saucer shaped

Answer 45

- initial range of increasing returns to scale - middle range of constant returns to scale - final range of decreasing returns to scale

Question 46

What are easily reversed?

Answer 46

short-run decisions

Question 47

what does the law of diminishing returns imply?

Answer 47

that eventually the marginal product curve will be negatively sloped as the variable input increases

Question 48

when AVC reaches its minimum, what happens to AP

Answer 48

AP reaches its maximum

Question 49

Can the short-run average total cost curve lie below the long- run curve?

Answer 49

no

Question 50

How is AP calculated

Answer 50

by dividing the quantity of labour employed from the total product

Question 51

marginal cost is the amount that…

Answer 51

total cost increases by when one more unit of output is produced

Question 52

if ATC is falling then MC must be

Answer 52

below ATC

Question 53

What doesn't cause decreasing ATC

Answer 53

increasing returns to scale

Question 54

When will the AVC curve shift up?

Answer 54

when the price of variable input decreases

Question 55

What does the MC curve intersect

Answer 55

the ATC and AVC curves at their minimum points

Question 56

AVC is at a minimum when AP is…?

Answer 56

at a maximum

Question 57

A rise in the price of a fixed input will cause a firm's…?

Answer 57

average price to shift up

Question 58

describe: the long- run average cost curve

Answer 58

- a planning curve - identifies the cost-minimizing plant size and quantity of labour for each output - is the relation between lowest attainable ATC and output when both plant size and labour are variable - consists of the segments of different short-run ATC curves along which the average total cost is lowest

Question 59

constant returns to scale means that as all inputs are increased…?

Answer 59

long- run average cost remains constant

Question 60

if all inputs are increased by 10% and output increases by less that 10% then…

Answer 60

there are diseconomies of scale

Question 61

What is a labour-intensive process

Answer 61

employs more labour and less capital

Question 62

what is a capital-intensive procrds?

Answer 62

employs more capital and less labour

Question 63

what are explicit costs

Answer 63

payments made by a business to businesses or people outside in it - also known as accounting costs

Question 64

what are implicit costs

Answer 64

the owners opportunity costs of being involved with the business

Question 65

what are economic costs

Answer 65

explicit costs and opportunity costs