Lecture 16 - Costs

Question 1

What is the relationship between economic and accounting costs?

Answer 1

Economic costs and accounting costs are different to each other

Question 2

What type of good is capital?

Answer 2

Capital is a durable good which provides services over a long period of time (eg. land, equipment and buildings)

Question 3

How do we measure the opportunity cost of capital?

Answer 3

• It is easy to measure the opportunity cost of capital when it is rented as the opportunity cost is simply the rental price
• Even if capital is purchased, the opportunity cost of using capital is the amount a firm could earn by renting it out to someone else

Question 4

Explain what fixed costs are and give some examples

Answer 4

• Fixed costs (F) are costs that do not vary with the level of output (q)
• Examples include overhead expenditure on land, office space and production facilities etc

Question 5

Explain what variable costs are and give some examples

Answer 5

• Variable costs (VC) are costs that vary with the level of output
• Examples include material and labour

Question 6

What are total costs?

Answer 6

• Total costs are the sum of fixed and variable costs
• TC = F + VC

Question 7

What are marginal costs?

Answer 7

• Marginal costs are the change in total costs if the firm produces an additional unit of output
• MC = dTC/dq = dVC/dq

Question 8

State the formulas used to calculate Average fixed costs (AFC), Average variable costs (AVC) and Average total costs (ATC)

Answer 8

• AFC = F/Q
• AVC = VC/Q
• ATC = C/Q = AFC + AVC

Question 9

When asked to derive a firm’s AFC, AVC, MC, C and AC curves, what does this actually mean?

Answer 9

It means write the different cost measures as a function of quantity (q)

Question 10

How can we calculate marginal cost (MC)?

Answer 10

We can calculate MC by either differentiating TC with respect to q or by differentiating VC with respect to q

Question 11

Explain the presence of fixed costs in both the short run and the long run

Answer 11

• In the short run the amount of some factor fixed so costs associated with that factor are fixed costs
• In the long run all factors are variable so there are no fixed costs

Question 12

What is an isocost line?

Answer 12

An isocost line shows combinations of inputs that require the same total expenditure