Firms and Decisions

Question 1

What are explicit costs?

Answer 1

Actual monetary payments paid to owners of FOPs for the use of FOPs not owned by the firm (eg. raw materials, wages, rent)

Question 2

What are implicit costs?

Answer 2

Costs of using FOPs that does not involve a direct payment to another party (eg. opp. cost of using FOP that firm already owns)

Question 3

What are fixed costs?

Answer 3

Costs that do not vary with the level of output of the firm (eg. rental cost)

Question 4

What are variable costs?

Answer 4

Costs that vary positively with the level of output. (eg. payment for raw materials, fuel)

Question 5

What is total cost?

Answer 5

total fixed cost + total variable cost
or
total opportunity COP (explicit costs + implicit costs)

Question 6

What is marginal cost?

Answer 6

Addition to total cost arising from an additional unit of output.

Question 7

What is average total costs?

Answer 7

Total costs per unit of output
ATC = AVC + AFC

Question 8

What is average variable costs?

Answer 8

Variable costs per unit of output.
AVC = TVC/Q

Question 9

What is average fixed costs?

Answer 9

Fixed costs per unit of output.
AFC = TFC/Q

Question 10

How does MC curve cut ATC curve?

Answer 10

The definition of MC implies that MC must cut the average total cost (ATC) curve at its minimum point.

Question 11

What are internal economies of scale?

Answer 11

Internal economies of scale refer to decreases in a firm’s UCOP when scale of production increases (output increase)

Question 12

What is market power?

Answer 12

Market power refers to a firm’s ability to influence the price of the good it sells.