Chapter 9 Flashcards
The ____ cost of any resource used to produce a good is the value or worth the resource would have in its best alternative use.
Economic
A firm’s economic costs are the sum of its explicit and implicit costs, both of which are considered opportunity costs.
____ costs are the monetary payments a firm makes to purchase resources from others.
Explicit
Because these costs involve an obvious cash transaction, they are called explicit costs. They are also opportunity costs because any amount of money that the firm uses to purchase a particular resource X is money that could have been used to purchase alternative resources.
Your company’s total sales revenue for the month is $150,000; the costs to produce your products are $12,000 for rent, $6,000 for utilities, and $42,000 for employee wages. What is your accounting profit?
$90,000
$150,000 - $60,000 (explicit costs) = $90,000
Accounting Profit: The total revenue of a firm less its explicit costs; the profit (or net income) that appears on accounting statements and that is reported to the government for tax purposes.
If economic cost is $96,000 and total revenue is $120,000, what is the economic profit?
$24,000
Economic profit equals total revenue minus economic cost.
Economic Profit: The return flowing to those who provide the economy with the economic resource of entrepreneurial ability; the total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called “pure profit” and “above-normal profit.”
True or false: Hourly labor, raw materials, and fuel are examples of resources a firm can easily adjust.
True
A firm can quickly and easily adjust its variable inputs such as hourly labor, raw materials, and fuel.
What best describes economic costs?
*Payments that must be made to obtain a resource
*Implicit costs
*Explicit plus accounting costs
*The lowest value attributed to a resource
Payments that must be made to obtain a resource
Economic cost is the income a firm must provide to the resource supplier to attract the resource away from an alternative use.
Economic costs are explicit plus implicit costs. Also, explicit costs and accounting costs are synonymous.
Which of the following explains the concept of explicit costs?
*A firm’s monetary payments made for the use of resources owned by others.
*A firm’s monetary payments that self-employed resources could have earned in their best alternative use.
*A firm’s monetary payments received for the use of resources owned by the firm.
*A firm’s monetary payments to those who supply labor services, materials, fuel, and transportation services.
*A firm’s monetary payments made for the use of resources owned by others.
*A firm’s monetary payments to those who supply labor services, materials, fuel, and transportation services.
Recall explicit costs are the monetary payments it makes to purchase resources from others.
What is the term for the total quantity of a specific good produced?
Total product
Assuming technology and production techniques are fixed and cannot change, if beyond some point of production a firm experiences declining units of additional output with each additional unit of labor input, then the firm is experiencing the effects of the law of ____.
Diminishing returns
law of diminishing returns: The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.
The ____ cost of any resource used to produce a good is the value or worth the resource would have in its best alternative use.
Economic
it is the income the firm must provide to resource providers to attract resources away from alternative uses.
____ costs are part of the simple existence of a firm’s plant and must be paid even when output is zero.
Fixed
A firm’s insurance premiums are generally considered ____ costs.
Fixed
What best characterizes variable costs?
Costs that change with the level of output
Variable cost: A cost that increases when the firm increases its output and decreases when the firm reduces its output.
____ cost is the sum of fixed cost and variable cost at each level of output.
Total
What is meant by the phrase “spreading the overhead”?
As production increases, average fixed cost (AFC) declines
How is average fixed cost determined?
Total fixed cost divided by output (quantity of product produced)
Which of the following are examples of fixed costs?
*interest on a firm’s debts
*rental payments
*labor
*transportation
*interest on a firm’s debts
*rental payments
Labor is a variable cost for when output rises so does the need for more workers and vice versa.
Transportation is a variable cost for when output rises so does the need to increase shipping and vice versa.
How is marginal cost (MC) calculated?
By dividing the change in total cost by the change in output
The extra (additional) cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output).
A firm’s decision whether to produce a few more or a few less units of output is a decision based on which of the following?
marginal data
The firm can control marginal costs directly and immediately. Specifically, MC designates all the cost incurred in producing the last unit of output. Thus it also designates the cost that can be “saved” by not producing that last unit.
What is the effect of an increase in the price of labor on the ATC, AVC, AFC, and MC curves?
* The average-fixed-cost curve remains the same.
* The average-variable-cost, average-total-cost, and marginal-cost curves shift downward.
* The average-variable-cost, average-total-cost, and marginal-cost curves shift upward.
* The average-variable-cost and average-total-cost curves shift upward, and the marginal-cost curve shifts downward.
- The average-fixed-cost curve remains the same.
- The average-variable-cost, average-total-cost, and marginal-cost curves shift upward.
Over what period of time can an industry and firms in that industry adjust all resource inputs used?
the long run
Some resources can be adjusted in the short run, such as the amount of labor, but not all resources, such as plant size.
What is the marginal cost when output changes from 300 to 301 units and total cost rises from $400 to $500?
$100
Marginal cost equals change in total cost divided by change in output.
What does the long-run average-total-cost curve show?
The lowest average total cost at which any chosen output level can be produced after the firm has had time to make adjustments in plant size
A firm’s decision about what output level to produce is typically a ____ decision.
marginal
The U-shape of the long-run average-total-cost curve results from which of the following?
- economies of scale
- diseconomies of scale
Which of the following are examples of labor specialization?
* Assigning each worker five or six unique tasks
* Assigning each worker one task instead of five or six
* Hiring fewer workers and creating fewer job classifications
* Hiring more workers in order to subdivide tasks
- Assigning each worker one task instead of five or six
- Hiring more workers in order to subdivide tasks
Why does the law of diminishing returns not account for the U-shape of the long-run average-total-cost curve?
in the long run all resources and inputs are fixed
Learning by doing contributes to a firm’s ____.
economies of scale
