Demand and Supply Analysis: the Firm

Question 1

Calculate and interpret accounting profit

Answer 1

Net income on income statement (total revenue minus accounting costs)

Question 2

Calculate and interpret economic profit

Answer 2

Accounting profit minus total implicit opportunity costs

Question 3

Calculate and interpret normal profit

Answer 3

Normal profit is level of accounting profit that just covers implicit opportunity costs

Question 4

Calculate and interpret economic rent

Answer 4

Surplus value resulting from fixed supply of particular good causing market price to be higher than cost to bring resource to market

Question 5

Calculate and interpret total revenue

Answer 5

Price times quantity sold

Question 6

Calculate and interpret average revenue

Answer 6

Total revenue divided by quantity sold

Question 7

Calculate and interpret marginal revenue

Answer 7

Change in total revenue divided by change in quantity

Question 8

Compare accounting, economic, normal profit, and economic rent

Answer 8

If accounting profit exceeds normal profit, market rewards firm. If just equals, no effect. If accounting profit less than normal profit, market punishes firm.

Question 9

Compare total, average, and marginal revenue

Answer 9

Marginal revenue equals average revenue in competitive market

Question 10

Describe a firm’s factors of production

Answer 10

land, labor, capital, and materials

Question 11

Calculate and interpret total costs

Answer 11

Total fixed costs plus total variable costs

Question 12

Calculate and interpret average costs

Answer 12

Total cost divided by quantity - maximize profit at lowest point on average cost curve

Question 13

Calculate and interpret marginal costs

Answer 13

Change in total cost divided by change in quantity sold - usually decline initially and increase at higher quantities

Question 14

Calculate and interpret fixed costs

Answer 14

Sum of all fixed expenses (incl. opportunity costs), which do not change based on quantity

Question 15

Calculate and interpret variable costs

Answer 15

Sum of all variable expenses (per unit variable cost times quantity) - increases when quantity increases

Question 16

Calculate and interpret breakeven points of production

Answer 16

Quantity where price, average revenue, and marginal revenue equal average total cost - want lower b/c easier to achieve, but higher should result in greater profits

Question 17

Calculate and interpret shutdown points of production

Answer 17

Quantity where average revenue less than average variable cost - requires shutting down and just paying fixed costs

Question 18

Describe approaches to determining profit maximizing level of output

Answer 18

Maximize spread on TR and TC;
MR equals MC; or
Revenue value of output from last unit of input employed equals cost of employing that input unit

Question 19

Describe how economies of scale and diseconomies of scale affect costs

Answer 19

As firm grows it can move to lower cost structure (economy of scale) or higher cost structure (diseconomy of scale)

Question 20

Distinguish between short-run and long-run profit maximization

Answer 20

TR>TC - stay in market
MR=MC - maximum profit in short run
TR>TVC; TR<TVC - shut down short term, exit long term

Question 21

Distinguish among decreasing cost, constant cost, and increasing cost industries - describe long run supply of each

Answer 21

Constant is where output increases by same proportion as increase in inputs. Decreasing/increasing self descriptive.

Question 22

Calculate and interpret total product of labor

Answer 22

Sum of all inputs during time period

Question 23

Calculate and interpret marginal produt of labor

Answer 23

Amount of additional output resulting from one more unit of input (assuming other inputs fixed)

Change in total product/Change in Labor

Question 24

Calculate and interpret average product of labor

Answer 24

Total product divided by quantity of given input

Question 25

Describe diminishing marginal returns

Answer 25

Adding additional inputs leads to lower marginal products, eventually becoming negative (fixed resources like plant size or quality of labor affect this)

Question 26

Calculate and interpret profit-maximizing utilization level of an input

Answer 26

Marginal Product times Price of Input

Question 27

Determine optimal combination of resources that minimizes cost

Answer 27

Marginal Revenue Product = MP times Product Price

Add as much of the highest MRP input and maximize profit when price of input equals MRP

Question 28

Elasticity of supply

Answer 28

Measures sensitivity in quantity supplied to change in price. Inelastic if change in price does not affect supply, creating economic rents.