Chapter 9

Question 1

What is accounting profit?

Answer 1

The difference between the total revenue from the sale of the firm’s product and the total explicit costs

Question 2

What is economic profit ?

Answer 2

The difference between the total revenue from the sale of a firm’s product and the total explicit and implicit costs

Question 3

What is production ?

Answer 3

The physical transformation of inputs into outputs

Question 4

What do inputs consist of/

Answer 4

Factors of production and intermediate inputs

Question 4

What is an intermediate input ?

Answer 4

Any good or service, other than the factors factors of production, which is used to produce something else

Question 5

What is a fixed input?

Answer 5

An input whose quantity cannot be altered in the short-run

Question 6

What is variable input?

Answer 6

One whose quantity can be changed in the short-run

Question 7

What are fixed costs?

Answer 7

Costs that remain constant irrespective of the quantity of the output reached

Question 8

What is variable cost ?

Answer 8

Cost that changes when total product changes

Question 9

What does the Law of diminishing marginal returns state ?

Answer 9

It states that as more of a variable input is combined with one or more fixed inputs in a production process, points will eventually be reached where first the marginal product, then the average product and finally the total product start to decline

Question 10

What are implicit costs ?

Answer 10

Opportunity costs that are not reflected in monetary payments

Question 11

What are explicit costs ?

Answer 11

The monetary payments for the factors of production and other inputs bought or hired by the firm

Question 12

What is the short-run in production?

Answer 12

The period during which atleast one of the inputs is fixed

Question 13

What is long-tun in production ?

Answer 13

The period during which all the inputs are variable

Question 14

How is the relationship between Total Production and the average and marginal product in the short-term ?

Answer 14

It is the same as any other Total, average and marginal maginudes relationship

• TP increases when MP is positive
• TP falls when MP is negative
• TP remains unchanged when MP=0
• AP increases when MP>AP
• AP decreases when MP<AP
• AP remains unchanged when MP=AP

Question 15

What assumptions do we make in analyzing the production in the short-run?

Answer 15

• The firm only produces one product
• All units of a given input are identical or homogenous
• The technical relationship between inputs and outputs( called the production function), is given and therefore cannot be changed
• The prices of the product of the inputs are given
• The firm uses fixed inputs and one variable input

Question 16

What is the relationship between production and costs ?

Answer 16

When marginal product is increasing, the marginal cost of producing a goof is falling, but when Marginal product declines, Marginal costs increases

Question 17

Long-run average costs ?

Answer 17

• If cost per unit of output falls as output increases, economies of scale are experienced
• If cost per unit of output increases, diseconomies of scale are experienced
• If cost per unit of output remains constant as output increases, constant costs are experienced