Chapter 7

Question 1

What are accounting costs?

Answer 1

These are direct costs of operating a business, including costs for raw materials, wages, rent etc.

Question 2

What are economic costs?

Answer 2

This is the sum of accounting and oppourtinity costs. This is the cost talked about in the book.

Question 3

What are opportunity costs?

Answer 3

This is the value of what the producers give up by using an input (value of best non-chosen alternative of using the input)

Question 4

What is economic profit?

Answer 4

This is the firm’s total revenue - economic costs

Question 5

What is accounting profit?

Answer 5

This is the total revenue - accounting costs.

Question 6

What are sunk costs?

Answer 6

These are costs that cannot be recovered once it has been paid for. One part of sunk costs is the difference between what you paid for a good and what you can sell it for.

After sunk costs have occurred, they should not influence your decision.

Question 7

What is specific capital?

Answer 7

This is capital that can only be used for its original application.

Question 8

What is operating revenue?

Answer 8

Revenue from selling an output.

Question 9

What are operating costs?

Answer 9

These are the costs incurred by selling your output.

You should remain selling as long as operating revenue is larger than operating costs, excluding sunk costs.

Question 10

what is the sunk cost fallacy?

Answer 10

This is the mistake in which you let sunk costs affect decisions about the future.

Question 11

What are variable costs?

Answer 11

Costs of input that change as quantity is changed. When the levels of input can easily be adjusted, the costs of those are variable.

Question 12

What is total cost?

Answer 12

This is the sum of fixed and variable costs.

Question 13

What other factors of input markets determine how easily input levels can be adjusted?

Answer 13

• Presence of active capital rental and resale markets. When things can be rented, the costs become variable instead of fixed.
• Labor contracts: some contracts specify a certain payment be made every month: fixed costs.

Question 14

What is the cost curve?

Answer 14

This curve shows the relationship between production cost and output. It consists of three lines:
1. Fixed costs line
2. Variable costs line
3. Total cost curve

Question 15

What are marginal costs?

Answer 15

These are a firm’s costs of producing one additional unit of output. It is equal to the change in TVC / Change in Q (fixed costs don’t change dependent on quantity)

Question 16

what is a short-run total cost curve?

Answer 16

This is a mathematical representation of total cost of producing different quantities of output at a fixed level of capital.

Question 17

What are long-run marginal costs?

Answer 17

This is the incremental cost of producing another unit when inputs are fully flexible.

Question 18

What are economies of scale?

Answer 18

This means that total costs rise slower than the output quantity. Long-run average total cost curve is downward, because ATC will decline.

Question 19

What are diseconomies of scale?

Answer 19

This means that total costs will rise faster than output quantity. Upward long-run ATC curve, ATC will increase.

Question 20

What are constant economies of scale?

Answer 20

This means that total costs and output quantity increase at the same quantity.

Question 21

What is the difference between economies of scale and returns to scale?

Answer 21

At returns to scale, the input increases at a certain proportion, whereas that is not important for economies of scale.

Increasing returns to scale means economies of scale, but not the reverse, because firms might be able to reduce the input costs by changing the input ratios.

Question 22

What is the scope?

Answer 22

SCOPE is the difference between total costs of single-good production and joint-good production.

Question 23

What are the classifications of SCOPE?

Answer 23

1. SCOPE > 0, there are economies of scope. Greater scope means bigger cost savings
2. SCOPE=0, cost are the same
3. SCOPE<0, cheaper to produce separately. This is called diseconomies of scope.

Question 24

What are the two important considerations for scope?

Answer 24

1. They are the scope at a given level of output for each good and might change as Q changes.
2. They do not have to be related to economies of scale.

Question 25

What are the three potential sources of economies of scope?

Answer 25

1. Different parts of a common input can be used in both production processes
2. Chemical properties might guarantee econoies of scope due to dissemination of input in production processes.
3. Knowledge and information used in one production process can be used in another.