Inputs and the Cost of Production

Question 1

What is periods of analysis? (Long Run VS Short Run)

Answer 1

Short-Run: Period during which at least one input to the production process cannot be varied.

• Example: Size or capacity of a production line

Long-run: Period during which ALL inputs CAN be varied

• For example Size or number of plans can be changed

Question 2

We are more concerned with short-run cost analysis rather than long-run?

Answer 2

TRUE

Question 3

What are short-run cost concepts:

Answer 3

1) Fixed cost - Does not change with changes in the level of output

Examples: Real property taxes, insurance, contracted rent

2). Total variable cost (VC). Varies directly with changes in the level of output

Examples: Raw materials, direct labor, electricity

3) Total cost= The sum of the two mentioned above

Question 4

What is the calculation for Averaged Fixed Costs (AFC)

Answer 4

Total Fixed Costs / Units Produced (Downward Sloping)

Question 5

What is the calculation for Average Variable Cost (AVC)

Answer 5

Total variable cost / Units produced (U-SHAPED BECAUSE OF THE LAW OF DIMINISHING RETURNS)

WHY? Initial variable inputs you get inputs as you increase product, but at some point you reach a level of production in which you additional units on serves to increase variable cost

Example: Adding to many employees that there starts to be confusion that variable costs go back up.

Question 6

What is the law of diminishing returns?

Answer 6

In a system with variable and fixed cost inputs, adding more variable inputs will eventually result in less and less output per unit of input

Question 7

What is marginal cost?

Answer 7

Cost of last acquired unit of input

Computed as:

Change in successive variable cost or,
Change in successive total cost

Question 8

In the long-run, all cost are variable, including size and number of plants?

Answer 8

TRUE