SR Production + Costs

Question 1

What is the Profit Function?

Answer 1

Profit = TR - TC

Question 2

How do you calculate Total Revenue?

Answer 2

TR = PQ

Question 3

What are Total Costs?

Answer 3

Total Opportunity Cost

Question 4

What 2 types of costs are included in Opportunity Cost?

Answer 4

Implicit and Explicit Costs

Question 5

Explicit Costs

Answer 5

Input costs that require expenditure by a firm

Question 6

Implicit Costs

Answer 6

Input Costs that do NOT require expenditure by a firm

Question 7

When are resources in their best use?

Answer 7

When they cover the Cost of their Next Best Use

Question 8

Concave Prod. Func. means the TC Curve is what shape?

Answer 8

Convex

Question 9

Convex Prod. Func. means the TC Curve is what shape?

Answer 9

Concave

Question 10

A Linear Production Function means the TC Curve is what shape?

Answer 10

Linear

Question 11

Fixed Costs

Answer 11

Costs that do NOT vary with Output

SR Concept

Question 12

Variable Costs

Answer 12

Costs that do Vary with Output

Question 13

How are Total Costs Calculated?

Answer 13

TC = FC + VC

The Full Cost of Production

Question 14

How is AFC Calculated?

Answer 14

Average Fixed Costs

AFC = FC / Q

Question 15

How is AVC Calculated?

Answer 15

Average Variable Costs

AVC = VC / Q

Question 16

How is ATC Calculated?

Answer 16

Average Total Costs

ATC = TC / Q = (FC + VC) / Q = AFC + AVC

Question 17

How is MC Calculated?

Answer 17

Marginal Costs

MC = dTC / dQ

Question 18

Draw AFC curve

Answer 18

Constantly Decreasing Costs as Output Increases

Question 19

Draw AVC curve

Answer 19

Slight U-Shaped Curve

Question 20

Draw ATC curve

Answer 20

U-Shaped Curve

Converges with AVC

Question 21

Draw MC curve

Answer 21

Initially Decreasing then Increases Exponentially

Question 22

Where does MC cross ATC and AVC?

Answer 22

At the Bottom point of ATC and AVC

Question 23

When is AC falling?

Answer 23

MC < AC

Additional Cost is lower than Average –> Average Cost falls

Question 24

When is AC rising?

Answer 24

MC > AC

Additional Cost is higher than Average –> Average Cost rises

Question 25

What happens to the Average if MC = AC

Answer 25

Average does NOT Change

Question 26

How do we find out how ATC changes with Q?

Answer 26

dATC / dQ

Question 27

How do you calculate dATC / dQ?

Answer 27

QUOTIENT RULE
ATC = TC/Q
dATC /dQ = [Q(dTC/dQ) - TC] / Q^2 = (MC - ATC) / Q
Since, MC = dTC / dQ

Question 28

For dATC / dQ, when Q > 0, when is ATC falling, rising and constant?

Answer 28

ATC Rising when–> MC > ATC
ATC Falling when–> MC < ATC
ATC Constant when–> MC = ATC

Question 29

When Labour is the only Variable Input, what is the Link between Production + Costs?

Answer 29

dVC = wdL, w = wage rate
Remember: MC = dTC/dQ = (dVC/dQ) + (dFC/dQ) = dVC/dQ
MPL = dQ / dL
==> MC = wdL / dQ
=====> MC = wdL / dQ = w / MPL
Therefore, when: MPL Increases –> MC Decreases
MPL Decreases –> MC Increases