Chapter 6

Question 1

Profit

Answer 1

is the total revenue the firm receives from the sale of its products minus
all costs incurred in their production:

Question 2

factors of production

Answer 2

• Labor
• Land
• Natural resources
• Capital: durable good used in production (example: machines)

Question 3

The short run

Answer 3

is the time frame in which some factors of production cannot be changed.

Question 4

The long run

Answer 4

is the time frame in which all factors of production can be altered.

Question 5

The opportunity cost of an item

Answer 5

refers to all those things that must be

foregone to acquire that item.

Question 6

Explicit costs

Answer 6

input costs that require an outlay of money by the firm

Question 7

Implicit costs

Answer 7

input costs that do not require an outlay of money by the firm

Question 8

economic profit

Answer 8

as total revenue minus total cost, including both explicit and implicit costs.

Question 9

accounting profit

Answer 9

as the firm’s total revenue minus only the firm’s explicit costs

Question 10

Sunk costs

Answer 10

are costs that have already been committed and cannot be recovered.

Question 11

production function

Answer 11

is the relationship between the quantity of inputs used to make a good and the quantity of output of that good

Question 12

The average product

Answer 12

is the total output divided by the variable factor of production.

Question 13

Diminishing marginal product

Answer 13

The property whereby the marginal product of an input declines as the quantity of input increases.

Question 14

Fixed costs FC

Answer 14

The costs of the fixed inputs. Costs that are not determined by the quantity of output produced

Question 15

Variable costs VC(Q)

Answer 15

The costs of the firm’s variable inputs. Variable costs are dependent on the quantity of output produced

Question 16

Total costs TC(Q)

Answer 16

The sum of fixed and variable costs

Question 17

Marginal cost MC

Answer 17

The increase in total cost that arises from an extra unit of production.

Question 18

average total cost curve

Answer 18

is U-shaped. As output increases, average total cost falls to a minimum and then increases. Influence of two opposing forces:

Question 19

The efficient scale of the firm

Answer 19

is the quantity of output that minimizes average total costs. This is not necessarily what the firms would choose to produce when they maximize profits.

Question 20

Constant returns to scale

Answer 20

Long-run average total cost stays the same as the quantity of output changes.

Question 21

Economies of scale or increasing returns to scale

Answer 21

Long-run average total cost falls as the quantity of output increases.

Question 22

Diseconomies of scale or decreasing returns to scale

Answer 22

Long-run average total cost rises as the quantity of output increases.

Question 23

Internal economies of scale

Answer 23

The advantages of large-scale production that arise through the growth of the firm.

Question 24

The basis of technical economies of scale

Answer 24

is that machinery and other factor

inputs can be utilized at bigger scales to bring down the unit cost of production.

Question 25

External economies of scale

Answer 25

The advantages of large-scale production that arise through the growth and concentration of the industry.