Production and Cost in the Firm

Question 1

Explicit Cost

Answer 1

opportunity cost of resources employed by a firm that takes the form of cash payments.

Question 2

implicit cost

Answer 2

a firm’s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

Question 3

accounting profit

Answer 3

a firm’s total revenue minus its explicit costs

Question 4

economic profit

Answer 4

a firms total revenue minus its explicit and implicit costs.

Question 5

normal profit

Answer 5

the accounting profit earned when all resources earn their opportunity cost.

Question 6

variable resource

Answer 6

any resource that can be varied in the short run to increase or decrease production

Question 7

fixed resource

Answer 7

any resource that cannot be varied in the short run

Question 8

short run

Answer 8

a period during which at least one of a firm’s resources is fixed

Question 9

long run

Answer 9

a period during which all resources under the firm’s control are variable.

Question 10

total product

Answer 10

a firm’s total output

Question 11

production function

Answer 11

the relationship between the amount of resources employed and a firms total product

Question 12

marginal production

Answer 12

the change in total product that occurs when the use of a particular resource increases by one unit, all other rescuers constant.

Question 13

increasing marginal returns

Answer 13

the marginal product of a variable resource increases as each additional unit of that resource is employed.

Question 14

law of diminishing marginal returns

Answer 14

as more of a variable resource is added to a given amount of another resource, marginal product eventually declines and could become negative.

Question 15

fixed cost

Answer 15

any production cost that is independent of the firm’s rate of output.

Question 16

variable cost

Answer 16

any production cost that changes as the rate of output changes.

Question 17

total cost

Answer 17

the sum of fixed cost and variable cost or TC= FC+VC

Question 18

marginal cost

Answer 18

the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in out put, or MC= ChangeTC/ Change q

Question 19

average variable cost

Answer 19

Variable cost divided by output, or AVC= VC/q

Question 20

average total cost

Answer 20

total cost divided by output, or ATC = TC/q; the sum of average fixed cost and average variable cost, or ATC= AFC+ AVC

Question 21

economies of scale

Answer 21

forces that reduce a firm’s average cost as the scale of operation increases in the long run.

Question 22

diseconomies of scale

Answer 22

forces that may eventually increase a firm’s average cost as the scale of operation increase in the long run.

Question 23

long-run average cost curve

Answer 23

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve.

Question 24

constant long-run average cost

Answer 24

a cost that occurs when, over some range of output, long-run average cost neither increases or decreases with changes in the firm size.

Question 25

minimum efficient scale

Answer 25

the lowest rate of output at which a firm takes full advantage of economies of scale.