Session 4: Production, costs, and profit maximization

Question 1

What is comparative advantage?

Answer 1

When a firm has a lower marginal cost for producing something than another firm

Question 2

What is absolute advantage?

Answer 2

When a firm can produce more of something than another firm

Question 3

What does lower marginal cost grant?

Answer 3

Comparative advantage

Question 4

What determines profit?

Answer 4

Average cost

Question 5

Does fixed cost vary with output?

Answer 5

No

Question 6

Does variable cost vary with output?

Answer 6

Yes

Question 7

In the very short-run, all costs are…

Answer 7

Fixed

Question 8

In the very long-run, all costs are…

Answer 8

Variable

Question 9

If MC < AC, AC is…

Answer 9

Declining

Question 10

If MC > AC, AC is…

Answer 10

Increasing

Question 11

When does MC = AC?

Answer 11

At minimum average cost

Question 12

What is the difference between fixed costs and sunk costs?

Answer 12

Fixed costs can be avoided (ie machinery)

Sunk costs are incurred and cannot be recovered (ie advertising expense)

Question 13

What is the formula for marginal cost?

Answer 13

ΔTC/ ΔQ

Question 14

What is the formula for average cost?

Answer 14

TC/Q

Question 15

If price is less than AVC, what should happen?

Answer 15

Shutdown

Question 16

As output increases, average cost likely declines because…

Answer 16

Economies of scale

Large scale allows specialization

Larger scale provides greater flexibility for optimizing results

Scale might give the firm buying power to negotiate lower prices

Question 17

Average cost likely increases because…

Answer 17

Diseconomies of scale

Larger firms are more complex and harder to manager

Diminishing returns to inputs