Costs and Revenues

Question 1

What do firms face in the short run and explain

Answer 1

Limited Flexibility

Varying the quantity of labour is easy - but varying the amount of capital is difficult

Question 2

What is labour seen as in the short run

Answer 2

A Flexible Factor

Question 3

What is capital seen as in the long run

Answer 3

A Fixed Factor

Question 4

Define the short run

Answer 4

The period over which the firm is free to vary the input of variable factors

Question 5

What is a firm able to do in the long run

Answer 5

Vary inputs of both variable and fixed factors

Question 6

What will determine the way in which output varies with quantities of inputs and what is certain

Answer 6

The nature of technology in the industry

If the firm increases the number of inputs of the variable factor (labour) while holding constant the input of the other factor (capital), it will gradually derive less additional output per unit of labour for each further increase - law of diminishing returns

Question 6

What will determine the way in which output varies with quantities of inputs and what is certain

Answer 6

The nature of technology in the industry

If the firm increases the amount of inputs of the variable factor while holding constant the input of the other factor - it will gradually derive less additional output per unit of labour for each further increase - law of diminishing returns

Question 7

What is the law of diminishing returns

Answer 7

A short run concept as it relies on the assumption that capital is fixed

If the firm increases the amount of inputs of the variable factor while holding constant the input of the other factor - it will gradually derive less additional output per unit of labour for each further increase

Question 8

How may costs be regarded in the short run

Answer 8

Fixed and variable

Question 9

What are sunk costs

Answer 9

Fixed costs that a firm cannot avoid paying even if it chooses to produce no output

Question 10

What are variable costs

Answer 10

Operating costs

Question 11

Total costs formula

Answer 11

Total costs = total fixed costs + total variable costs

Question 12

When will total costs increase and why

Answer 12

As the firm increases the volume of production

More of the variable input is needed to increase output

Question 13

s

Answer 13

l

Question 14

Costs in the long run

Answer 14

A firm is likely to choose the level of capital that is appropriate for the level of output that it expects to produce - due to a firm being able to vary both capital and labour

Question 15

How is average fixed cost calculated

Answer 15

Fixed costs / Output

Question 16

What happens to AFC as output increases

Answer 16

Will always continue to fall because fixed cost is being spread across a greater output

Question 17

Average Variable Cost formula

Answer 17

Variable Costs / Output

Question 18

How is Average Cost / Average Total Cost calculated

Answer 18

AFC + AVC

or

Total Cost / Quantity Produced

Question 19

What is Marginal Cost

Answer 19

Change in total costs when one additional unit of output is produced

Gradient of the total cost curve

Question 20

Where does Marginal Cost always go through

Answer 20

The minimum point of the average variable cost and average total cost curves

Question 21

What must occur if marginal cost is greater than the average cost

Answer 21

Average cost must be rising

Question 22

When is the only time that average cost is not falling or rising

Answer 22

When marginal cost = average cost

AND

the average has stopped falling and has yet to start rising

Question 23

Define Revenue

Answer 23

Payments firms receive when they sell the good and services they produce over a given time period

Question 24

Firms total revenue formula

Answer 24

Price x Quantity Sold

Question 25

What is a firms marginal revenue and what is the formula

Answer 25

Additional revenue arising from the scale of an additional unit of output

Change in total revenue / Change in quantity

Question 26

What is a firms average revenue

Answer 26

Average Revenue per unit sold

Total Revenue / Quantity

Question 27

What is AR always equal to

Answer 27

The price of the product

Question 28

Why is the analysis of revenue not the same for all firms

Answer 28

Depends on whether or not the firm has any control over the price at which it sells its product

Question 29

Which situations do we make a distinction on for a firms revenue

Answer 29

When the firm has no control over price and price is constant as output varies

The firm has some degree of control over price, and price varies with output