Exam 2 Material Flashcards
Sunk Costs
sunk costs are unrecoverable costs that should not effect current decisions
In the short run, fixed costs are
sunk costs
In the short run, fixed costs should be
ignored
Economic profit
total revenue minus total costs (total cost= explicit + implicit costs)
If total revenue is greater than total cost, then economic profit is
positive
if total revenue is less than total cost, then economic profit is
negative
Accounting costs are only those costs that the firm
explicity pays (i.e. costs that an accountant sees)
Economic profit is always ____ than accounting profit
less
Do accounting costs account for the owner’s forgone value of time?
no. The value of the owner’s time is an implicit cost.
Output is the same thing as
total product
If a firm makes pizzas, its total product will be measured in terms of
pizzas
Inputs
are resources that a firm uses to produce a final product
The variable input discussed in class is
labor (i.e. workers)
For a pizza company, an example of a fixed input is
ovens
In the short run only ____ inputs can be changed
variable
Teamwork and specialization occur in the _____ portion of the total product curve.
convex
Congestion occurs in the ____ portion of the total product curve.
concave
The marginal product of labor
the change in total output that results from increasing the amount of labor by 1 unit.
Eventually, the marginal product of labor
decreases
The total product curve is convex when the output is ____ at an _____ rate.
increasing; increasing
The total product curve is concave when the ouptut is _____ at a _____ rate
increasing; decreasing
True or False: an extra worker will always add to total product
false
When there is one worker: 2 televisions are made per hour. When there are two workers: there are 10 televisions made per hour. Hence, the marginal product of the 2nd worker is
8 televisions per hour
the marginal product curve reflects changes in the _____ curve
total product
When the total product curve is convex, marginal product is
increasing
When the total product curve is concave, marginal product is
decreasing
Suppose the 4th worker produces an additional 6 pizzas. Is marginal product increasing or decreasing?
not enough information
When total product reaches its maximum, marginal product equals
0
Marginal product is the slope of the
total product curve
Average product is a measure of
how much each worker produces on average.
When marginal product is higher than average product, average product is
rising
Wage
is a payment to an employee for labor services
Variable costs
are costs that change with the amount of output being produced.
In the case of labor, variable cost=
of workers*wages
If 4 workers are hired at a wage of $10/hr, VC=
$40
True or False. Variable costs and marginal costs are essentially the same thing
False
When total product increases, then variable costs will ___
increase
Variable cost can be graphed by plotting ____ on the y-axis and ____ on the x-axis
variable cost; total product
Marginal cost
is the cost incurred by producing one additional unit of a good.
Suppose with 3 workers: VC= $30 and TP= 20. With 4 workers: VC= $40 and TP= 25. Marginal cost=
$2 per unit
The formula for marginal cost=
change in VC/ change in TP
If change in variable cost= $5, and change in quantity=2, then marginal cost=
$2.50 per unit
When there is teamwork and specialization, marginal cost is
decreasing
When there is congestion (i.e. decreasing productivity), marginal cost is
increasing
Changes in marginal cost are always the result of changes in
productivity
If you keep hiring more workers, then at some point they will inefficiently use the ___ ___
fixed inputs (thus marginal cost inreases)
When plotting the marginal cost curve, what goes on the x-axis?
TP
When graphing marginal product, what goes on the x-axis?
of workers
Marginal cost is rising when marginal product is
falling
When marginal product is rising, marginal cost is
falling
When marginal cost is at a minimum, then ____ is at a maximum
marginal product
marginal cost and marginal product are ____ related
inversely
The slope of the variable cost curve is
marginal cost
Marginal product is the addition to total product from
hiring one more worker
marginal cost is the addition to total costs from
producing another unit
You can find marginal cost by dividing W by
MP. (MC=wage/MP)
True or false: marginal product and marginal cost curves are mirror images of one another.
true
Short run
a brief period of time during which only one input can be varied
In class examples, what was the variable input?
The number of workers
Fixed inputs
inputs in the production production process that do not change with changes in output. Examples are machinery and factories.
Total fixed costs (FC)
short-run costs that do not vary with output
Do all firms have fixed inputs in the short run?
yes
The fixed inputs are usually the ____ and equipment, and the variable input is ____.
factory; labor
To produce output, firms have to combine ____ and ____ inputs.
fixed; variable
Are there fixed inputs in the long run?
no. Every input is variable.
Can a small company transform into a large company in the short run?
no
Can a small company transform into a large company in the long run?
yes
Can a firm vary the size of its factory in the short run?
no
Can a firm vary the size of its factory in the long run?
yes
A firm with market power is called a price ____
setter
How much market power do competitive firms have?
zero
Competive firms are called price ____
takers
How much influence does a competive firm have over the price the good it sells?
zero
Do competitive firms have to accept the price determined by the market?
yes
A firm that has market power is usually ____ relative to the size of the market.
large
Can price setters influence the price of their product?
yes
What are the 3 characteristics of perfect competition?
- the output of a single firm is relatively small. 2) all firms sell identical products and customers do not distinguish between products. 3) there are no barriers to entry.
What is a competitive firm’s demand curve determined by?
the market price. a firm’s demand curve is flat and equal to the market price.
If a firm tries to raise their price above the market price, what happens?
the firm sells nothing
how many units can a firm sell at the market price?
as much they want
what is the difference between ‘market price’ and ‘equilibrium price’?
nothing. they are the same thing.
What is the formula for total revenue (TR)?
TR= P*y In other words price*quantity.
What is the difference between total product and quantity?
nothing. they are the same thing.
If the market price is $4 and y= 20. What is total revenue?
$80
The total revenue curve looks like a _____
straight line with a positive slope.
A competitive firm’s profit maximizing output level is where its MC curve equals
the product price. (the MC curve must be increasing at this point)
When q=3; MC= $4, when q=4; MC= $5. If the price is $4.50, how many units should the firm sell?
3 (assuming fractional units are not an option)
Marginal revenue
the change in total revenue that results from a change in output
For a competitive firm, what is the difference between price and marginal revenue?
nothing. they are the same thing for a competitive firm.
On a graph, what shape is TR?
a rectangle
