Mico exam 2 7

Question 1

What is the distinction between Explicit cost and Implicit cost?

Answer 1

Explicit Costs:
Direct, measurable monetary expenses incurred for resources or inputs.
Examples: wages, rent, raw materials, utilities, advertising costs.
Easily recorded and visible in financial statements.
Implicit Costs:
Opportunity costs associated with using self-owned resources.
Examples: foregone earnings, self-use of capital, time opportunity cost.
Difficult to quantify, subjective, and often overlooked.

Question 2

How is Accounting profit different from Economic profit?

Answer 2

Accounting Profit:
Definition: Accounting profit is the straightforward profit calculated by subtracting explicit costs (such as wages, rent, and materials) from total revenue.
Focus: It considers only explicit costs and is used for financial reporting and tax purposes.
Formula: Accounting Profit = Total Revenue - Explicit Costs.
Shortcomings: It ignores implicit costs (opportunity costs) and does not provide a complete picture of profitability.
Economic Profit:
Definition: Economic profit accounts for both explicit and implicit costs. It considers the opportunity cost of using self-owned resources.
Focus: It provides a more accurate measure of profitability by considering all costs.
Formula: Economic Profit = Total Revenue - (Explicit Costs + Implicit Costs).

Question 3

How is Short-run production defined in Microeconomics?

Answer 3

Short run production refers to the period of time during which at least some factors of production are fixed1. Examples of short run production include a company that is able to produce 10 cars in a day and looks to produce more cars (15 cars per day) by using the available infrastructure due to increasing demand during the season

Question 4

What is a fixed input in the short run?

Answer 4

A short run is characterized by the presence of at least one fixed input, with the rest being variable; input refers to factors or elements that directly affect a company’s operations and resulting output.

Question 5

What is a variable input in the short run?

Answer 5

Variable inputs are those that can easily be increased or decreased in a short period of time.

Question 6

total product

Answer 6

Total Product refers to the total output produced by a given quantity of input (such as labor) in the production process.
It represents the cumulative quantity of goods or services produced as more units of the input are employed.
Mathematically, TP is the sum of the output produced by each unit of input.
For example, if an ice cream factory produces 100 ice cream cones per day using varying numbers of workers, the total number of ice cream cones produced is the total product.

Question 7

average product

Answer 7

Average Product measures the average output per unit of input (usually labor).
It is calculated by dividing the total product (TP) by the quantity of the input (e.g., the number of workers).
Mathematically, AP = TP / Number of Workers.
AP provides insights into the efficiency of labor utilization. When AP is increasing, each additional worker contributes more to output. Conversely, when AP decreases, additional workers contribute less on average.
For instance, if the ice cream factory produces 100 cones with 10 workers, the average product of labor is 10 cones per worker.

Question 8

marginal product

Answer 8

Marginal Product represents the additional output produced by employing one more unit of input (e.g., hiring an additional worker).
It quantifies the change in total product resulting from a small increase in input.
Mathematically, MP = Change in TP / Change in Input (e.g., Change in TP / Change in Labor).
Diminishing marginal returns occur when MP starts to decline as more units of input are added. This reflects the law of diminishing returns.
In our ice cream factory example, if hiring an extra worker increases the total production from 100 to 110 cones, the marginal product of that worker is 10 cones.

Question 9

Increasing Marginal Product:

Answer 9

Marginal product refers to the additional output produced by adding one more unit of a variable input (such as labor or raw materials).
When the marginal product increases as more units of the variable input are employed, we observe increasing marginal returns.

Question 10

Diminishing Marginal Product:

Answer 10

Diminishing marginal returns occur when the marginal product of the variable input starts to decline.
As more units of the variable input are added, the additional output gained becomes smaller and smaller.

Question 11

Total Fixed cost, Total Variable cost, and Total cost.

Answer 11

Total cost is the sum of all costs incurred in producing a certain number of goods. Fixed costs are the costs that are independent of the number of goods produced, or the costs incurred when no goods are produced Total variable cost is the opposite of fixed costs. These are the costs that change when more is produced The relationship between these three cost types can be defined by the formula: Total Costs = Variable Costs + Fixed Costs

Question 12

Calculating Average fixed/ variable/total cost from total values. What do their graphs look like
in the short run?

Answer 12

In the short run, understanding cost curves is essential for businesses. Let’s break down the concepts of average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC):

Average Fixed Cost (AFC):
AFC represents the fixed cost per unit of output.
It is calculated by dividing the total fixed cost by the quantity of output.
The graph of AFC is downward-sloping because as production increases, the fixed cost gets spread over more units, reducing the average fixed cost.
Average Variable Cost (AVC):
AVC represents the variable cost per unit of output.
It includes costs directly related to production, such as labor and materials.
Calculated by dividing the total variable cost by the quantity of output.
The AVC curve is U-shaped. Initially, it decreases due to increasing returns to scale (more efficient production), but eventually, it rises due to diminishing returns (inefficiencies).
Average Total Cost (ATC):
ATC combines both fixed and variable costs.
Calculated by dividing the total cost (sum of fixed and variable costs) by the quantity of output.
The ATC curve also exhibits a U-shape. It mirrors the AVC curve but is slightly higher due to the fixed costs.
Now, let’s visualize these cost curves:

AFC: Initially high and gradually decreasing as output increases.
AVC: Initially decreasing, then rising as production expands.
ATC: U-shaped, reflecting both fixed and variable costs.

Question 13

11. Short run relation between Marginal and Average costs.

Answer 13

When MC is less than AC:
The AC curve is falling or downward sloping.
This occurs when each additional unit of output adds less to the total cost than the average cost.
In other words, producing more output becomes relatively cheaper.
The intersection point of MC and AC corresponds to the bottom of the AC curve.
At this point, MC equals AC, and the AC curve reaches its minimum.
When MC is greater than AC:
The AC curve is rising or upward sloping.
Each additional unit of output contributes more to the total cost than the average cost.
Producing more output becomes relatively more expensive.
The AC curve increases as MC exceeds AC.

Question 14

What does the minimum point of the Short-run Average cost curve signify?

Answer 14

since the fixed capacity is folly utilized the ATC reaches a minimum point. This is the point of optimum utilization of fixed factors. If the output continues to increase beyond this point the fixed factors get over utilized and therefore the ATC rises upwards

Question 15

Shape of the Long-run Average Cost curve
○ Dis-economies of Scale and Decreasing Returns to Scale
○ Economies of Scale and Increasing Returns to Scale
○ Constant returns to scale

Answer 15

Economies of Scale:
Occur when the long-run average total cost (LAC) decreases as output increases.
Factors contributing to economies of scale include specialization, better sourcing, and improved efficiency.
The LAC curve slopes downward during this phase.
Diseconomies of Scale:
Occur when the LAC increases as output increases.
Challenges arise due to increased coordination complexities as organizations grow.
The LAC curve starts to rise, indicating diseconomies of scale.
Constant Returns to Scale:
Occur when costs remain unchanged as output increases.
The LAC remains relatively stable during this phase.
Firms achieve optimal efficiency.

Question 16

How does a change in resource price, technology, and Government taxes shift the short-run Cost
curves?

Answer 16

Resource Price Changes:
Higher resource prices shift the short-run aggregate supply (SRAS) curve upward and leftward, leading to reduced output and potentially higher prices.
Lower resource prices shift the SRAS curve downward and rightward, resulting in increased output and potentially lower prices.
Technological Changes:
Positive technological advancements shift the SRAS curve downward and rightward, improving efficiency and lowering costs.
Negative technological changes shift the SRAS curve upward and leftward, leading to higher costs.
Government Taxes:
Increased taxes shift the SRAS curve upward and leftward, reducing output and potentially raising prices.
Reduced taxes shift the SRAS curve downward and rightward, increasing output and potentially lowering prices.
Remember, these factors influence production costs and equilibrium levels in the short run

Question 17

Suppose Ernie gives up his job as financial advisor for P.E.T.S., where he earned $30,000 per year, to open up a store selling pet-care products. He invested $10,000 in the store, which were originally savings that earned 5 percent interest. This year, the revenue from the new business was $50,000 and the explicit costs were $10,000. The accounting profit earned by Ernie was _____.

Answer 17

​$40,000
50,000-10,000

Question 18

​If variable cost rises from $60 to $100 as output increases from 15 to 20 units, the marginal cost of the twentieth unit is

Answer 18

$8

Question 19

​Which of the following is true of the relationship between marginal cost and marginal product?

Answer 19

​When marginal product increases, marginal cost falls.

Question 20

​Which of the following is true of the MC curve?

Answer 20

​It intersects both the ATC and the AVC curves at their minimums.

Question 21

​For each size of plant a manufacturer could build, there is a different:

Answer 21

short run average total cost curve

Question 22

​Which of the following correctly describes the relationship between the marginal cost and average variable cost curves?

Answer 22

​Marginal Cost crosses Average Variable Cost at Average Variable Cost’s minimum point

Question 23

For a large firm that produces and sells automobiles, which of the following costs would be a variable cost?

Answer 23

the steel that is used to produce the automobiles

Question 24

The minimum points of the average variable cost and average total cost curves occur where the

Answer 24

marginal cost curve intersects those curves.

Question 25

In the long run a company that produces and sells popcorn incurs total costs of $1,150 when output is 70 canisters and $1,000 when output is 100 canisters. The popcorn company exhibits

Answer 25

economies of scale because average total cost is falling as output rises.

Question 26

In the long run, if inputs are increased by 10 percent and output increases by 20 percent, then __________ are said to exist.

Answer 26

economies of scale

Question 27

Minimum efficient scale refers to the

Answer 27

lowest output level at which average total costs are minimized.

Question 28

A firm can use a given plant more intensively and it can change the size of a plant. When it uses a given plant more intensively, it is holding one factor __________ and therefore the time period of production is most likely the __________.

Answer 28

fixed, short run

Question 29

The firm negotiates a new agreement with its workers for lower wages. The ATC curve should be __________ and the AFC curve should be __________ after the agreement goes into effect.

Answer 29

lower; unchanged

Question 30

In the electricity generation industry, the cost per kilowatt hour of electricity declines as the capacity to generate output increases. This situation represents:

Answer 30

economies of scale