Firm Costs

Question 1

What is the objective of a firm and what does that objective look like?

Answer 1

The objective of a firm is to maximize their profit.
Firm’s Profit: Total Revenue - Total Cost
If a firm makes one Product TR = PQ

Question 2

What are the true profits of a firm?

Answer 2

The true profits of a firm are True Economic profit = TR - Total Cost
And in this Total Cost includes Explicit Cost & Implicit Cost

Whereas accounting profit = TR - Explicit Cost

Question 3

What are the production models for firms?

Answer 3

Firms produce goods by taking inputs and transforming them into goods they sell called inputs.

Question 4

What is the amount of output produced dependent on?

Answer 4

The quantity of inputs available and characteristics of production technology.

Question 5

What are the types of Inputs?

Answer 5

Fixed Inputs: can’t be adjusted quickly 
Variable: Can be adjusted at any time 
Labour
Raw materials 
Capital (Financial assets & physical capital)

Question 6

What is an assumption we make about the short run?

Answer 6

That capital is fixed in the short run

Question 7

What is the total product curve?

Answer 7

It is the relationship between Qoutput & Qinput showing how the Qoutput depends on the Quantity of a variable input with everything else held constant

Question 8

What is the Marginal Product of Labour?

Answer 8

It is the additional Qoutput produced from an additional unit of labour.
🔺Qoutput
—

Question 9

Describe the concept of the diminishing returns to an input

Answer 9

It is the concept that the more a firm produces, the lower the additional quantity of an output by the additional quantity of an input used.

Question 10

What is the relationship between the Total Product curve and the marginal product labour?

Answer 10

Not ironclad but essentially Marginal Product labour is the slope/rate of change of the Total Product curve

Question 11

What is the relationship between the amount of capital, TP & MpL?

Answer 11

The relationship is that if capital increases TP & MpL increase as well

Question 12

What are the costs of production?

Answer 12

The costs of production are divided into fixed costs and variable costs.

Question 13

What are fixed costs?

Answer 13

Costs that do not depend on output: The Cost of the fixed inputs and these are essentially like sunk costs.

Question 14

What are variable costs?

Answer 14

They are costs that depend on output: the cost of the least amount of the variable inputs needed to make the amount of output.

Question 15

What is the Total Cost and the Total Cost curve?

Answer 15

The total cost curve is the relationship between Total Cost and the quantity produced.

TC = TFC + TVC

Question 16

What is the relationship between Marginal Cost and Average Total Cost?

Answer 16

If MC < ATC, ATC is decreasing
If MC > ATC, ATC is increasing
Meaning that for short run production
-the marginal product curve is diminishing
-MC is increasing
-for large fixed costs ATC> MC when the Quantity is low
-Therefor this implies a u shaped ATC curve

Question 17

What is a firm’s marginal cost?

Answer 17

A firm’s MC is the change in Total Cost of one additional unit
🔺TC
MC= —

Question 18

What is a firm’s average total cost?

Answer 18

It is the Total Cost divides the Total Quantity by the Total Quantity.
TC
ATC=—

Question 19

What is a firm’s variable cost?

Answer 19

It is the total variable cost per unit of output.
TVC
AVC = —

Question 20

What is a firm’s average fixed cost?

Answer 20

It is the total fixed cost per unit of output.
TFC
TFC=—

Question 21

How do firms maximize profit in the short run?

Answer 21

They have to produce until MC= P.

Question 22

How do firms maximize profits in the kind run?

Answer 22

They maximize profits by choosing the most cost minimizing combination of all inputs because in the long run, all inputs are variable and therefore no fixed costs.

Question 23

How do firms in the long run choose Cost minimizing inputs?

Answer 23

Firms in the long run choose the fixed inputs that minimize the short run average cost at a particular output.

Question 24

What is the shape of the long run average total cost curve determined by?

Answer 24

It is determined by the scales of production

Question 25

What are the “returns to scale?”

Answer 25

The returns to scale explains the rate of increase in outputs relative to the rate of increase in inputs, in the long run.

Question 26

What is an increasing return to scale?

Answer 26

Also known as diminishing cost, It is when the Long run TAC declines as the output increases
Therefore as the amount of input increases by a certain amount, the output increases at a higher rate

Question 27

What is a decreasing rate of scale?

Answer 27

The fact that Long run TAC increases as output increases therefore as the amount of input increases the output increases at a lower rate

Question 28

What is a constant return to scale?

Answer 28

A constant return to scale is the Long run TAC is constant as output increases meaning that as the amount of input (factors of production) increases, output increases at the same rate

Question 29

What does the graph look like for increasing returns to scale?

Answer 29

Concave upward sloping graph with outputs on the y axis and inputs on the x-axis showing that as the inputs increase, outputs are increasing by more

Question 30

What does the graph look like for decreasing returns to scale?

Answer 30

A convex upwards sloping graph to show that output is still increasing but not as much as input is increasing

Question 31

What does the graph of the constant returns to scale look like?

Answer 31

An upward sloping straight diagonal line because the slope is constant therefore the outputs and inputs are increasing by the same factors