Revenues, Costs profits and objectives

Question 1

Define short run

Answer 1

The period over which a firm is free to vary the input of one of its factors of production (labour), but faces a fixed input of the other (capital)

Question 2

Define Long run

Answer 2

the period over which the firm is able to vary the inputs of all its factors of production

Question 3

What is the law of diminishing returns?

Answer 3

law stating that if a firm increases its inputs of one factor of production while holding inputs of the other factor of production fixed it will eventually derive diminishing marginal returns from the variable factor

Question 4

Define total fixed costs

Answer 4

costs that do not vary with the level of output.

Question 5

Define sunk costs

Answer 5

short-run costs that cannot be recovered if the firm closes down

Question 6

Define total variable costs

Answer 6

the sum of costs that vary with the level of output

Question 7

Define average total cost

Answer 7

total cost divided by the quantity produced

Question 8

Define marginal cost

Answer 8

the cost of producing an additional unit of output

Question 9

What point should the MC curve intersect the AC curve?

Answer 9

The MC curve should go through the minimum point go the AC curve.

Question 10

Define economies of scale

Answer 10

occur for a firm when an increase in a firm’s scale of production leads to production at lower long-rum average costs

Question 11

Define Natural Monopoly

Answer 11

A monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable

Question 12

Define Diseconomies of scale

Answer 12

occur for a firm when an increase in the scale of production leads to higher long-run average costs

Question 13

Define Internal economies of scale

Answer 13

Economies of scale that arise from the expansion of a firm.

Question 14

Define External Economies of scale

Answer 14

Economies of scale that arise from the expansion of the industry in which a firm is operating.

Question 15

Define Productive efficiency

Answer 15

occurs when firms have chosen appropriate combinations of factors of production and produce the maximum output possible from those inputs, thus producing at minimum long-run average costs

Question 16

Define Minimum efficient scale

Answer 16

The level of output at which long-run average cost stops falling as output increases.

Question 17

Define constant returns of scale

Answer 17

found when long-run average cost remains constant with an increase in output, i.e. when output and costs rise at the same rate.

Question 18

Define normal Profit

Answer 18

profit that covers the opportunity cost of capital and is just sufficient to keep the firm in the market

Question 19

Define supernormal profits

Answer 19

Profits that exceed normal profits

Question 20

Define Marginal Revenue

Answer 20

The additional revenue gained by a firm selling an additional unit of output

Question 21

Define shut-down price

Answer 21

The price below which a firm will cease production in the short run, as it is not covering its variable cost.

Question 22

Define X-inefficiency

Answer 22

situation arising when a firm is not operating at minimum cost, perhaps because of organisational slack

Question 23

Define Satisficing

Answer 23

Behaviour under which the managers of firms aim to produce satisfactory results for the firm, e.g. in terms of profits rather than trying to maximise them.

Question 24

Define Bounded rationality

Answer 24

a situation in which a firm’s ability to take rational decisions is limited by the lack of information or an inability to interpret the information available.

Question 25

Define Corporate social responsibility

Answer 25

actions that a firm takes in order to demonstrate its commitment to behaving in the public interest