Cost curves

Question 1

Profit equation

Answer 1

Pi = TR - TC

Question 2

Outputs equation

Answer 2

Q = f (K,L,N)

K: capital, L: labour, N: natural resources

Question 3

In short run

Answer 3

At least one input is fixed

Question 4

In long run

Answer 4

All inputs are variable

Question 5

Marginal product

Answer 5

Increase in output that arises from an additional unit of that input.

Question 6

Diminishing MP

Answer 6

Marginal product declines as quantity of input increases

Question 7

Law of diminishing MP

Answer 7

diminishing MP sets in at some point (impacts SR cost functions)

Question 8

Fixed cost

Answer 8

doesn’t vary with quantity of output

Question 9

Variable cost

Answer 9

Varies with quantity of output

Question 10

Marginal cost

Answer 10

Increase in TC that arises from an extra unit of production.

Mc = change in TC / change in Q

Question 11

ATC u-shaped because…

Answer 11

Initially TFC spread over few units (high ATC)
Then ATC declines when TFC spread over more units
ATC increases when AVC starts to increase (due to diminishing returns)

Question 12

when MC

Answer 12

AC must be falling (and vice versa)

Question 13

MC intersects AC at..

Answer 13

AC’s lowest point

Question 14

Efficient scale is at…

Answer 14

the quantity that minimises AC

Question 15

Economies of scale

Answer 15

LR ATC decreases as quantity of output increases

Question 16

Diseconomies of scale

Answer 16

LR ATC increases as quantity of output increases

Question 17

Constant returns to scale

Answer 17

LR ATC stays constant as quantity of output changes

Question 18

Average revenue

Answer 18

AR = TR/Q

Question 19

Marginal revenue

Answer 19

MR = change in TR / change in Q

Question 20

Point of profit maximisation

Answer 20

MC = MR