Chapter 6 (Cost of production)

Question 1

opportunity costs (OC)

Answer 1

OC of an item refers to all the foregone (‘lost’) costs, such as the wages of employees, costs of inputs, rental of machines or buildings, etc. OC are the ∑ of: Explicit cost and Implicit cost

Question 2

Explicit cost = ?

Answer 2

Explicit cost = input costs that require an expense of money by the firm

Question 3

Implicit cost = ?

Answer 3

Implicit cost = input costs that does not require and expense of money by the firm

Question 4

Economic profit measures …

Answer 4

Economic profit measures profit with both explicit and implicit costs.

Question 5

Accounting profit measures…

Answer 5

Accounting profit measures profit with only the explicit costs

Question 6

Sunk costs = ?

Answer 6

Sunk costs = cost that have been committed and cannot be recovered (irrelevant to firm’s current decision because nothing can be done).

Question 7

production function = ?

Answer 7

Production function = relationship between quantity of inputs used and quantity of outputs (K=Capital, L=Labour):

Question 8

Marginal product MP =?

Answer 8

Marginal product MP is the increase in output arising from an extra unit of input.
𝑀𝑃𝐿 =𝛥𝑄/𝛥𝐿 = slope of production function

Question 9

Average product AP is = ?

Answer 9

Average product AP is:
𝐴𝑃𝐿 = Q/L

Question 10

Fixed costs FC = ?

Answer 10

Fixed costs FC = costs of the fixed inputs and that are not determined by the quantity of output produced (e.g.: rents paid for buildings)

Total costs TC(Q) = FC + VC(Q)
Average FC = AFC = FC/Q
Average VC = AVC = AV(Q)/Q
Average TC(Q) = ATC = TC(Q)/Q

Question 11

Variable costs VC(Q) = ?

Answer 11

Variable costs VC(Q) = costs of the firm’s variable inputs and that depend on the quantity of output produced (e.g.: wages paid to workers, oranges for orange juice)

Total costs TC(Q) = FC + VC(Q)
Average FC = AFC = FC/Q
Average VC = AVC = AV(Q)/Q
Average TC(Q) = ATC = TC(Q)/Q