Chapter 8: Costs

Question 1

Fixed Cost

Answer 1

Cost that does not vary with the level of output in the short run (the cost of all fixed factors of production).

Question 2

Variable Cost

Answer 2

Cost that varies with the level of output in the short run (the cost of all variable factors of production).

Question 3

Total Cost

Answer 3

All economic costs of production: the sum of variable and fixed cost.

Question 4

Average Fixed Cost

Answer 4

Fixed cost divided by the quantity of output.

Question 5

Average Variable Cost

Answer 5

Total variable cost divided by the quantity of output.

Question 6

Average Total Cost

Answer 6

Total cost divided by the quantity of output.

Question 7

Marginal Cost (MC)

Answer 7

Change in total cost that results from producing an additional unit of output.

Question 8

Isocost line

Answer 8

A set of input bundles, each of which costs the same amount.

Question 9

Optimal Input Combination

Answer 9

for a production process employing N inputs, X1, X2, …, XN.

Question 10

Output Expansion Path

Answer 10

The locus of tangencies (minimum cost input combinations) traced out by an isocost line of given slope as it shifts outwards into the isoquant map for a production process.

Question 11

Reasons for a firm’s marginal and average costs declining:

Answer 11

• When workers first undertake a task it may take them a long time. As they become familiar with it, their speed increases.
• Managers of the production process learn by their mistakes and, over time, plan the whole production process better to increase efficiency.
• Engineers may streamline their product designs to save time without increasing defects. Better specialized tools and more effective plant organization may also lower production cost.
• Some suppliers of the materials used in the production process may also become more efficient, pass this on via lower prices, and thus lower costs for the manufacturer.