Lesson 1.4

Question 1

explain opportunity cost

Answer 1

revenue a manager could have received if she had used her resources to produce the next best alternative product or service. That is, opportunity costs are the revenues forgone if resources (inputs) are not optimally used

Question 2

do you minimize/maximize opportunity cost by using resources as efficiently as possible?

Answer 2

minimize

Question 3

explain economic cost

Answer 3

cost of a product is equal to sum of production costs (explicit costs) and opportunity costs (implicit costs)

Question 4

opportunity cost doctrine

Answer 4

the inputs’ values (when used in their most productive way) together with production costs (the accounting costs of producing a product) determine the economic cost of production

Question 5

define explicit cost

Answer 5

ordinary items accountants include as firm expenses

Question 6

define historical cost

Answer 6

money that managers actually paid for an input

Question 7

explain sunk cost

Answer 7

resources that have already been spent and cannot be recovered

Question 8

what should managers do with sunk costs?

Answer 8

ignore them when making decisions about future actions, they are irrelevant to financial decisions

Question 9

what do cost functions show?

Answer 9

relationship between input costs and output

Question 10

how is cost structure of a firm determined?

Answer 10

production function and the input prices it faces

Question 11

what can cost functions and production functions be?

Answer 11

short run and long run

Question 12

define short run

Answer 12

period of time between the situation in which the quantity of no input is variable and the situation where all quantities of inputs are variable; where quantity of at least 1 input is fixed

Question 13

what is a more restrictive definition of short run

Answer 13

time interval so brief that managers cannot change the quantities of plant or equipment employed in production

Question 14

what are fixed inputs?

Answer 14

inputs that cannot be changed in short run

Question 15

what do fixed inputs determine?

Answer 15

the scale (size) of the plant

Question 16

what is total fixed cost

Answer 16

cost per period of time spent on fixed inputs

Question 17

what kind of value is TFC

Answer 17

constant, does not vary with level of output produced

Question 18

explain total variable cost

Answer 18

cost spent on variable inputs

Question 19

what happens to TVC as output increases?

Answer 19

increases since greater output requires more inputs

Question 20

what rule does total variable cost follow?

Answer 20

law of diminishing marginal returns

Question 21

what is total cost TC?

Answer 21

TFC + TVC

Question 22

what do cost functions predict?

Answer 22

how costs change with the level of output

Question 23

formula for ATC

Answer 23

AFC + AVC

Question 24

x axis and y axis graph of MC, AVC, AFC, ATC

Answer 24

y axis is cost per unit of output, x axis is unit of output

Question 25

explain graph of MC

Answer 25

decreases for a little and then increases (checkmark)

Question 26

explain graph of ATC

Answer 26

higher than AVC and ATC, U shape with only slight increase, minimum where ATC = MC

Question 27

explain graph of AFC

Answer 27

decreases in an increasing way; passes through the intersection of AVC and MC

Question 28

explain graph of AVC

Answer 28

U shape, starts in middle of MC and AFC curve; minimum where AVC = AFC = MC; hits minimum before ATC; inverse of AP curve

Question 29

formula for AVC

Answer 29

TVC / Q = (PX)/Q = P(1/AP)

Question 30

what is MC

Answer 30

incremental cost of producing one more unit of output

Question 31

formula for MC for continuous units

Answer 31

dTC/dQ = dTVC / dQ = P(dX/dQ) = P(1/MP) (forgone)

Question 32

formula for MC for discrete units (whole numbers only)

Answer 32

change in TC / change in Q = change in TVC / change in Q

Question 33

final formula for MC between Q and Q - 1

Answer 33

where C(Q) is the total cost of producing Q units of output, it is C(Q) - C(Q-1)

Question 34

what does long run average cost function LAC show

Answer 34

minimum cost per unit of output for any size of plant

Question 35

how is LAC related to short run cost functions?

Answer 35

for each level of output, the point on the lowest short run cost function for that level of output will also lie on the LAC curve

Question 36

what is LRTC

Answer 36

long run total cost function: shows the relationship between long run total cost and output

Question 37

formula for LRTC

Answer 37

Q*L(Q)

Question 38

LAC formula

Answer 38

L(Q)

Question 39

explain long run marginal cost function

Answer 39

function representing how varying output affects the cost of producing the last unit if the manager has chosen the most efficient input bundle

Question 40

long run marginal cost function

Answer 40

M(Q) = dLRTC / dQ = L(Q) + Q[dL(Q) / dQ]

Question 41

how does M(Q) relate to LAC = L(Q) curve?

Answer 41

similar shape; M(Q) < LAC when LAC curve is decreasing. M(Q) = LAC when LAC is minimized. M(Q) > LAC when LAC is increasing

Question 42

what happens to long run marginal cost function if the manager has chosen optimal scale of plant

Answer 42

M(Q) = short run MC at that level of output

Question 43

define economies of scale

Answer 43

when a firm's avg unit cost decreases as output increases

Question 44

how can we tell if a firm has economies of scale from LAC curve

Answer 44

if it is decreases as output increases (downward sloping)

Question 45

define diseconomies of scale

Answer 45

when avg cost per unit of output increases as output increases

Question 46

explain economies of scope

Answer 46

exist when cost of jointly producing 2 or more products is cheaper than producing each of the products separately

Question 47

formula for if economies of scope is possible

Answer 47

if S = C(Q1) + C(Q2) - C(Q1 + Q2) / C(Q1 + Q2) is positive, then there is economies of scope

Question 48

what is break even

Answer 48

what level of output equates revenue and costs; output level that must be reached if managers are to avoid losses

Question 49

formula for break even level of output QB

Answer 49

QB = TFC / (P - AVC)

Question 50

define profit contribution analysis

Answer 50

break even analysis to understand relationship between price and profit

Question 51

formula to figure out what level of sales would earn a specific profit

Answer 51

Q = TFC + profit target / profit contribution per unit

Question 52

formula for profit contribution

Answer 52

total revenue - TVC or on a per unit basis: Price - AVC

Question 53

formula for economic profit

Answer 53

accounting profit - opportunity cost

Question 54

when is AP=MP

Answer 54

when AP is maximized

Question 55

what can economies of scale result from

Answer 55

larger plant size and/or increase in # of plants

Question 56

how can economies of scale by exploited?

Answer 56

by changes in production, distribution, raising capital, advertising and other business processes

Question 57

what does S measure in economies of scope formula?

Answer 57

the percentage of saving that results from producing jointly over individually

Question 58

LAC graph

Answer 58

U with x - quantity of output, y - average cost