Q2 L2: cost of production (INCLUDED IN FINALS)

Question 1

Formula for profit?

Answer 1

Profit = Total revenue – Total cost

Question 2

the amount a firm receives from the sale of its output

Answer 2

Total revenue

Question 3

the market value of the inputs a firm uses in production

Answer 3

Total cost

Question 4

require an outlay of money, e.g., paying wages to workers.

Answer 4

Explicit costs

Question 5

do not require a cash outlay, e.g., the opportunity cost of the owner’s time.

Answer 5

Implicit costs

Question 6

total revenue minus total explicit costs

Answer 6

Accounting profit

Question 7

total revenue minus total costs (including explicit and implicit costs)

Answer 7

Economic profit

Question 8

ignores implicit costs, so it’s higher than economic profit.

Answer 8

Accounting profit

Question 9

shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good.

Answer 9

production function

Question 10

The ____________________ of any input is the additional output after hiring one more worker, holding all other inputs constant.

Answer 10

marginal product

Question 11

formula for the Marginal product of labor (MPL)?

Answer 11

Marginal product of labor (MPL) = ∆ Q ÷ ∆ L

∆ Q = change in output
∆ L = change in labor

note: ∆ (delta) = “change in…”

Question 12

Why is MPL Important

Answer 12

PRINCIPLE 3: Rational people think at the margin.

Question 13

The marginal product of an input declines as the quantity of the input increases (other things equal).

Answer 13

Diminishing marginal product

Question 14

is the increase in Total Cost from producing one more unit

Answer 14

Marginal Cost (MC)

Question 15

formula for the Marginal Cost (MC)?

Answer 15

Marginal Cost (MC) = ∆ TC ÷ ∆ Q

∆ TC = change in total cost
∆ Q = change in output

note: ∆ (delta) = “change in…”

Question 16

do not vary with the quantity of output produced.

Answer 16

Fixed costs (FC)

Question 17

vary with the quantity produced.

Answer 17

Variable costs (VC)

Question 18

formula for the Total cost (TC)?

Answer 18

Total cost (TC) = FC + VC

Fixed costs (FC)
Variable costs (VC)

Question 19

equals total cost divided by the quantity of output

Answer 19

Average total cost (ATC)

Question 20

formula for the Average total cost (ATC) ?

Answer 20

Average total cost (ATC) =

(1.) ATC = TC ÷ Q

(2.) ATC = AFC + AVC

Total cost (TC)
Output (Q)
Fixed costs (FC)
Variable costs (VC)

Question 21

Costs are critically important to many business decisions including?

Answer 21

• production,
• pricing, and
• hiring.

Question 22

/not a question/

Answer 22

/SUMMARY/
- Implicit costs do not involve a cash outlay, yet are just as important as explicit costs to firms’ decisions.

• Accounting profit is revenue minus explicit costs. Economic profit is revenue minus total (explicit + implicit) costs.
• The production function shows the relationship between output and inputs.
• The marginal product of labor is the increase in output from a one-unit increase in labor, holding other inputs constant. The marginal products of other inputs are defined similarly.
• Marginal product usually diminishes as the input increases. Thus, as output rises, the production function becomes flatter and the total cost curve becomes steeper.
• Variable costs vary with output; fixed costs do not.

Answer 23

/DEFINITIONS AND FORMULAS/

Explicit costs
- Costs that require an outlay of money by the firm

Implicit costs
- Costs that do not require an outlay of money by the firm

Fixed costs (FC)
- Costs that do not vary with the quantity of output produced

Variable costs (VC)
- Costs that vary with the quantity of output produced

Total cost
- The market value of all the inputs that a firm uses in production
- Formula: TC = FC + VC

Average fixed cost
- Fixed cost divided by the quantity of output
- AFC = FC / Q

Average variable cost
- Variable cost divided by the quantity of output
- AVC = VC / Q

Average total cost
- Total cost divided by the quantity of output
- ATC = TC / Q

Marginal cost
- The increase in total cost that arises from an extra unit of production
- MC = ∆ TC / ∆ Q