Lecture 06 # Cost Behavior

Question 1

What is cost behavior?

Answer 1

Cost behavior refers to how costs change with the level of activity or production. It’s key for budgeting, financial planning, and decision-making.

Question 2

What are the types of cost?

Answer 2

Typesof Cost,
1. Total cost/ TC.
2. Total fixed cost / TFC.
3. Total variable cost/ TVC
4. Average cost / AC
5. Average fixed cost / AFC.
6. Average variable cost/ AVC
7. Marginal cost / MC

Question 3

Define Total Cost with formula.

Answer 3

1. Total cost (TC): The sum of all costs for producing a certain quantity of goods or services.
   Formula: TC = TFC + TVC.

Question 4

Define Total Fixed Cost with formula.

Answer 4

2. Total fixed cost (TFC): The sum of costs that do not change with production levels.
   Formula: TFC = TC – TVC.

Question 5

Define Total Variable Cost with formula.

Answer 5

3. Total variable cost (TVC): The sum of costs that vary with production levels.
   Formula: TVC = TC – TFC.

Question 6

Define Average Cost with formula.

Answer 6

4. Average cost (AC): The cost per unit of production.
   Formula: AC = AFC + AVC OR TC / Q.

Question 7

Define Average Fixed Cost with formula.

Answer 7

5. Average fixed cost (AFC): The fixed cost per unit of production.
   Formula: AFC = AC – AVC OR TFC / Q.

Question 8

Define Average Variable Cost with formula.

Answer 8

6. Average variable cost (AVC): The variable cost per unit of production.
   Formula: AVC = AC – AFC OR TVC / Q.

Question 9

Define Marginal Cost with formula.

Answer 9

7. Marginal cost (MC): The additional cost of producing one more unit of output.
   Formula: MC = TC n – TC n1 OR ∆TC / ∆Q.

Question 10

Describe Short-Run cost behavior.

Answer 10

In the short run, cost behavior is influenced by the fact that some costs are fixed and cannot be changed, while others are variable and can change with the level of production or activity.

Question 11

Describe Long-Run cost behavior.

Answer 11

In the long run, cost behavior differs from the short run because all costs are variable, and firms have the flexibility to adjust all inputs, including capital.

Question 12

What is an impact of long-run cost on industry?

Answer 12

The impact of long-run costs on industry structure is profound, as they influence the size, number, and competitiveness of firms within an industry.

Question 13

What is the concept of iso-cost and iso-quant in microeconomics?

Answer 13

The concepts of Iso cost and isoquant are fundamental in microeconomics, particularly in the study of production and cost functions. They are tools used to analyze the optimal combination of inputs that firms use to produce a given level of output.

Question 14

Define Iso-quant?

Answer 14

Iso-quant
Definition: An isoquant is a curve that represents all the combinations of two inputs (usually labor and capital) that produce the same level of output.

Question 15

Define Iso-cost.

Answer 15

Iso-cost
Definition: An iso-cost line represents all the combinations of two inputs (labor and capital) that have the same total cost.

Question 16

What is Iso-quant map?

Answer 16

Iso-quant Map: A graph with multiple isoquants representing different output levels.

Question 17

What is Iso-cost line?

Answer 17

Iso-cost Line: A straight line on the same graph, with different lines representing different total costs.

Question 18

What is tangency point?

Answer 18

Tangency Point: The point where an isoquant and an iso-cost line touch, indicating the optimal input combination.