Module 6 - Production

Question 1

Why do we need to calculate average costs?

Answer 1

The numbers are more manageable and allow us to compare them directly with price and determine profitability.

Question 2

Why do we break the ATC into it’s two components: AFC and AVC? (Two reasons)

Answer 2

1. Examining AFC alone helps us see that it is an ever-decreasing function of output. (The more output a firm produces, the more it spreads out it’s total fixed cost)
2. AVC will be used later to determine whether a firm that is losing money should continue to operate or it should shut down in the short run.

Question 3

In deciding on how much output should be produced to maximize profits, firms need two pieces of information:

1. ___
2. ___

Answer 3

1. Marginal cost (cost associated with producing an additional unit of output)
2. Marginal revenue (extra benefit associated with producing that unit of output)

Question 4

If MC > ATC, then ATC ___.

Answer 4

↑

Question 5

If MC > AVC, then AVC ___.

Answer 5

↑

Question 6

If MC < ATC, then ATC ___.

Answer 6

↓

Question 7

If MC < AVC, then AVC ___.

Answer 7

↓

Question 8

If MC = ATC, then ATC ___.

Answer 8

Remains unchanged

Question 9

If MC = AVC, then AVC ___.

Answer 9

Remains unchanged

Question 10

___ is the cost associated with the use of resources; the sum of explicit and implicit costs.

Answer 10

Economic costs

Question 11

___ are monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others; also called accounting costs.

Answer 11

Explicit costs (seen)

Question 12

___ is the opportunity costs of using owned resources; costs which no monetary payment is explicitly made.

Answer 12

Implicit (unseen)

Question 13

Accounting profit is ___.

Answer 13

TR - explicit costs

Question 14

Economic profit is ___.

Answer 14

TR - economic costs

Question 15

Economic costs are ___.

Answer 15

Explicit costs - implicit costs

Question 16

Total revenue is ___.

Answer 16

Price (Qt)

Question 17

Zero accounting profit means ___. When Implicit costs are taken into account then ___.

Answer 17

You’re making enough to cover all monetary expenses.

Your economic profit is negative, which isn’t good

Question 18

Zero economic profit means ___.

Answer 18

Your revenues are covering all explicit and implicit costs - you’re doing just as well as you could in your next-best option.

Question 19

___ is the time period in which at least one input of production is fixed, but other inputs can be changed.

Answer 19

Short-run

Question 20

___ is the total amount of output produced when given the amount of resources.

Answer 20

Total product (TP)

Question 21

___ is the additional output produced as a result of utilizing one more unit of variable resource.

Answer 21

Marginal product (MP)

Question 22

___ is the average amount of output produced per unit of a resource employed.

Answer 22

Average product (AP)

Question 23

___ is a characteristic of production whereby the marginal product of the next unit of variable resource utilized is greater than that of the previous variable resource.

I.e., not enough employees resulting in overworked employees

Answer 23

Increasing marginal returns

Question 24

___ is a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource.

I.e., too many employees resulting in less productive hours

Answer 24

Diminishing marginal returns

Question 25

___ are costs that do not allow for change with the amount of output produced.

Answer 25

Fixed costs

Question 26

___ are costs that change with the amount of output produced, increasing as production increases and decreases as production decreases.

Answer 26

Variable costs

Question 27

___ is the sum of fixed and variable costs of production.

Answer 27

Total costs

Question 28

On a graph, where is TC, TVC, and TFC?

Answer 28

A - TC

B - TVC

C - TFC

Question 29

___ is fixed cost per unit.

Answer 29

Average fixed cost (AFC)

Question 30

___ is variable cost per unit.

Answer 30

Average variable cost (AVC)

Question 31

___ is the total cost per unit

Answer 31

Average total cost (ATC)

Question 32

On a graph, where is ATC, AVC, and AFC?

Answer 32

A - ATC

B - AVC

C - AFC

Question 33

___ is the additional cost associated with one more unit of an activity; difference between P2 - P1.

Answer 33

Marginal cost (MC)

Question 34

The average value ___ when the marginal value rises above it.

Answer 34

↑

Question 35

The average value ___ when the marginal value falls below it.

Answer 35

↓

Question 36

The average value ___ when the marginal value is equal to it.

Answer 36

Stays unchanged

Question 37

___ is a curve showing the ATC for different levels of output when at least one input of production is fixed, typically plant capacity.

Answer 37

Short-run ATC (avg total cost)

Question 38

___ is a curve showing the lowest ATC possible for any given level of output when all inputs of production are variable.

Answer 38

Long-run ATC (avg total cost)

Question 39

___ is a condition in which the long-run ATC of production decreases as production increases.

Answer 39

Economies of scale

Question 40

Economies of scale can result form a variety of factors including productivity gains from ___ and ___ as firms purchase larger quantities and benefit from ___.

Answer 40

More specialized labor

Lower costs of inputs

Bulk pricing

Question 41

What does the colored portion of the graph represent?

Answer 41

Economies of Scale

Output increases as ATC decreases

Benefit from bulk pricing and larger Q purchases

Question 42

___ is a condition in which the long-run ATC of production increases as production increases.

Answer 42

Diseconomies of scale

Question 43

What does the colored portion of the graph represent?

Answer 43

Constant returns to scale

Additional output doesn’t affect LRATC

Question 44

Constant returns to scale occur because the firm is ___ or ___; they reach minimum level of output necessary to achieve the lowest possible LRATC.

Answer 44

Unable to benefit from further efficiency gains

Lower input costs

Question 45

___ is a condition in which the long-run ATC of production remains constant as production increases.

Answer 45

Constant returns to scale

Question 46

What does the colored portion of the graph represent?

Answer 46

Diseconomies of scale

LRATC (long-run average total cost) of production increases as output increases

Lower levels of efficiency

Question 47

Diseconomies of scale shows as firms continue to grow, it becomes more difficult to manage; ___ and ___ contribute to lower levels of efficiency -

Answer 47

Increasing costs

Complexity

Question 48

___ is the lowest level of output at which the long-run ATC is minimized.

Answer 48

Minimum efficient scale

Question 49

What does the arrow point to on the graph?

Answer 49

Minimum efficiency scale is the lowest level of output at which the long-run ATC is minimized.

Question 50

___ refers to the lowest level of output at which the LRATC is minmized.

Answer 50

Minimum-efficiency sacle

Question 51

The shape of the marginal cost curve is dependent upon ___.

Answer 51

Law of diminishing marginal returns