micro - cost of production

Question 1

What is the classical theory of a firms objective and when is it uncontroversial ?

Answer 1

Firms Objective - the basic classical assumption / theory is that the goal of the firm is to maximize profits ( the total revenue - total cost)
* Uncontroversial when the firms objective is managed by its owner, since the profit of he firm is (one component of ) the owners income
Therefore, becomes more complicated when ownership is fragmented, as in many companies, so that the firm is effectively un by managers

Question 2

What are three ways to avoid managerial discretion of profit?

Answer 2

1. Performance based compensation schemes
2. Takeover of management ( taking over the responsibility for the management without effecting the change in management personnel )
3. firing

Question 3

What are critics of managerial theories ?

Answer 3

This argues that managers may still retain some discretion by maximising their own objectives fro example salary, presitige and side benefits

It is important to understand the more important one can differ from every scenario.

Question 4

What is thee cost of production?

Answer 4

This is the cost of producing a good or service including : 1. implicit cost ( input costs than do not require an outlay of money by the firm )
2. explicit cost ( costs are input costs than require a direct outlay of money by the firms )
3. opportunity cost ( the next best alternative forgone)

Question 5

What is a fixed cost?

Answer 5

These are costs that are those costs that do not vary with the quantity of output produced e.g rent

Question 6

What is a variable cost?

Answer 6

Variable costs are those that do not vary with the quantity of output produced e.g materials

Question 7

What cant fixed costs have an impact on?

Answer 7

CANNOT Fixed costs do into affect a firms strategy (how much they should produce or pricing strategy)

CAN : Fixed cost scale determine a firms decision whether to stay int he market or exit

Question 8

What is the equation for TC? (considering variable and fixed)

Answer 8

TC =. TFC + TVC

Question 9

What is the equation for AC ? (considering variable and fixed) + what is the relationship between AC and TC and what happens when ATC is declining to output?

Answer 9

ATC = AFC + AVC

The relationship is that AC is TC / q

Average total cost declines as output increases this is why firms benefit with purchasing economies of scale

Question 10

What is Marginal Cost and what two equation scan you use to get to MC?

Answer 10

Marginal costs measures the increase in total cost due to one extra unit of production / output ( can be referred to as the unit incremental cost )

MC(Q) = change in cost / change in q

MC = dc(Q) / dQ

Question 11

What is the effect scale?

Answer 11

This is the bottom of the ATC curve where the average total cost is minimized

Question 12

What happens when the ATC curve is increasing and decreasing?

Answer 12

ATC curve starts decreasing because of increasing returns as more units of variable factors of production are added to the fixed factors of production.

But, when the diminishing returns set in, the ATC curve reversed its course and started moving upward

Question 13

What happens when the MC is greater or less than the ATC?

Answer 13

This means the MC is not the same as the ATC and so will drag the AC in the same direction as the MC

Question 14

What is the difference between short run and long run?

Answer 14

Short run is where some costs are fixed but in the long run, all costs become vairbale

Question 15

What must a firm consider when deciding to stay active or exit a market?

Answer 15

A firm must decide to stay active depending on whether its fixed costs are recoverable or sunk costs - this is a cost than cannot be replaced if the firm stops producing
However, economic agents must not fall into sunk cost fallacy ( whereby a person is reluctant to abandon a strategy or a firm because they have invested heavily, eve though abandonment would be beneficial.

Question 16

What to do when MR is greater or less than MC ?

Answer 16

When MC < MR Increase Q

When MC > MR decrease Q

Question 17

What is a shutdown?

Answer 17

A shutdown refers torefers to a short run decision not to produce anything during a specific period of time because of current market conditions

Question 18

When should a firm shutdown?

Answer 18

The firm shuts down if the revenue to gets from producing is less than the variable cost of production

Question 19

Exit Defintion

Answer 19

An exit refers to a long run decision to leave the market

Question 20

When should a firm exit the the market?

Answer 20

The firm exits if the revenue it would get frorm producing is less than its total cost

Question 21

When can a firm exit and enter a market and what can effect this decision?

Answer 21

Firms cannot exit ad enter the market in the short run, this only occurs in the long run

This is can be impacted on by the sunk cost fallacy - whereby a person is reluctant to abandon a strategy because they ave invested heavily into it, even though abandonment would be beneficial.

Question 22

1. C(Q) = 0
2. C(Q) = a + bQ + cQ^2

Which equation is in the long run and short run?

Answer 22

In short run = 1
In long ru C(Q) = 0