Cost Minimization and Profit Maximization

Question 1

Firm Designs

Answer 1

What is produced? Is it different from the competitors?

Question 2

Firm Produces

Answer 2

How are goods produced? How much is produced?

Question 3

Firm Sells

Answer 3

At which price?

Question 4

Equimarginal Principle

Answer 4

Principle that an activity should be pursued to the point where marginal benefits equal marginal costs

Question 5

Marginal Benefits (MB)

Answer 5

The additional benefits gained from the last unit of activity

Question 6

Marginal Costs (MC)

Answer 6

The additional costs associated with the last unit of an activity

Question 7

Decision Making

Answer 7

Weigh the costs and benefits that vary with the consequence of a decision and only costs and benefits that vary with the decision.

Question 8

Fixed Cost Fallacy

Answer 8

You consider costs and benefits that do not vary with the consequences of your decision, you make decisions using irrelevant costs and benefits

Question 9

Fixed Cost Fallacy Example

Answer 9

Overhead is a fixed or sunk cost. Do not vary with outpout decisions and should be ignored in the decision-making process

Question 10

Big Fixed Cost

Answer 10

If the “overhead” charge is big enough to deter an otherwise profitable product launch, you commit the fixed-cost fallacy

Question 11

Overhead charges are analogous to

Answer 11

a “tax” on launching a new product

Question 12

Hidden-Cost Fallacy

Answer 12

It occurs when you ignore relevant costs, i.e., those costs that do vary with the consequences of your decision

Question 13

Slope of the (Total) Revenue Curve

Answer 13

Marginal Revenue

Question 14

Fixed Costs

Answer 14

Costs that do not vary with the quantity of output. Fixed costs are avoidable only in the long run

Question 15

Variable Costs

Answer 15

Costs that vary with the quantity of output. Variable costs are avoidable

Question 16

Marginal Costs

Answer 16

The additional costs assocaited with the last unit of an activity

Question 17

Increasing Marginal Costs

Answer 17

The condition where each additional unity of an activity is more expensive than the last

Question 18

Sunk Costs

Answer 18

A cost that can no longer be avoided. Once they are sunk they are irrelevant to any future decision making and should not be accounted for in market exit decisions

Question 19

Implicit Costs

Answer 19

a.

Question 20

Explicit Costs

Answer 20

b.

Question 21

Opportunity Costs

Answer 21

Equal to the value of a foregone opportunity. The cost of a item, or project, is what you give up to get that item, or undertake that project.