Theory of the firm

Question 1

factors of production

Answer 1

land labor capital enterprise

Question 2

law of deminishing returns

Answer 2

refer to a point at which the level of profit or benefits gained is less than the amount of money invested

Question 3

cost of production

Answer 3

can be fixed TFC

variable TVC

Question 4

total fixed cost definition

Answer 4

cost that does not change with an increase or decrease in the amount of goods or services produced

Question 5

Total variable cost definition

Answer 5

coat that vary depending on a company’s production volume

Question 6

average fixed cost def

Answer 6

fixed cost of production divided by quantity of output produced

Question 7

average variable cost def

Answer 7

AVC=TFC/Q

variable cost of production divided by quantity of output produced

Question 8

marginal cost def

Answer 8

added cost incurred in producing an additional unit of output.

MC=change TC/change Q

Question 9

average total cost

Answer 9

ATC= AFC+AVC

total cost of production divided by quantity of output produced

Question 10

total cost

Answer 10

TC=TFC+TVC

Question 11

why MC cross ATC?

Answer 11

MC= one extra
ATC= the average
when we have one more test and get a bad grade, the average go down. As more you take tests, the average will cross the marginal curve. MC cannot go down while ATC can at some example

Question 12

increasing return def

Answer 12

operate every additional investment of capital and labour yield less than proportionate returns

Question 13

constant return def

Answer 13

ratio between the input and outputs

Question 14

zero return def

Answer 14

When there is no profit

Question 15

negative return def

Answer 15

each additional unit of output reduces the level of output

Question 16

marginal product def

Answer 16

MP=change TP/change#workers

output that results from one additional unit of a factor of production , all other factors remain constant

Question 17

diminishing return def

Answer 17

refer to a point at which the level of profit or benefits gained is less than the amount of money invested

Question 18

the spreading effect

Answer 18

The larger the output the greater the quantity of output over which fixed cost is spread leading to lower average cost

Question 19

the short run

Answer 19

taken or considered over a short period of time

Question 20

the long run

Answer 20

all costs are variable in the long run

Question 21

Long run average total cost def

Answer 21

LRATC
the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

Question 22

economies of scale def

Answer 22

when increasing the scale of production leads to a lower cost per unit of output

Question 23

constant cost def

Answer 23

the point between disec and econ of scale

Question 24

diseconomies of scale

Answer 24

where the costs per unit of output increase as the scale of production increases.

Question 25

internal economies of scale

Answer 25

firm-specific, or caused internally, while external economies of scale occur based on larger changes outside of the firm. Both types result in declining marginal costs of production; yet, the net effect is the same.

Question 26

internal diseconomies of scale

Answer 26

economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.

Question 27

external economies of scale

Answer 27

increase the productivity of an entire industry, geographical area or economy. The external factors are outside the control of a particular company, and encompass positive externalities that reduce the firm’s costs

Question 28

external diseconomies of scale

Answer 28

factors beyond the control of a company increases its total costs, as output in the rest of the industry increases. The increase in costs can be associated with market prices increasing for some or all of the factors of production

Question 29

internal vs external economies of scale effect on the graph

Answer 29

internal sources cause a movement along the LRATC curve

external source cause a shift in the LRATC curve

Question 30

sources of internal economies of scale

Answer 30

• technical source
• managerial
• marketing
• distribution

Question 31

sources of external economies of scale

Answer 31

• infrastructure (roads, electricity …)

- strong industry (competitors)

Question 32

minimum efficient scale

Answer 32

the level of output where econ of scale and constant cost start

Question 33

optimal output

Answer 33

maximum quantity produced before the company starts to experience diseconomies of scale

Question 34

revenue def

Answer 34

firms total earnings from a specified level of sales within a specified period

Question 35

total revenue

Answer 35

TR=QxP

firms total earnings from a specified level of sales within a specified period

Question 36

average revenue

Answer 36

AR=TR/Q

is the amount that the firm earns per unit sold

Question 37

marginal revenue

Answer 37

MR=(change TR)/(change in Q)

the total extra revenue by selling one more unit (per period of time)

Question 38

profit maximization rule

Answer 38

he short run or long run process by which a firm determines the price and output level that returns the greatest profit.
MC=MR

Question 39

normal profit

Answer 39

returns or earnings needed to keep a firm operating

Question 40

economic profit

Answer 40

The monetary costs and opportunity costs a firm pays and the revenue a firm receives. calculated by substrating explixit cost and implicit cost

Question 41

explicit cost

Answer 41

A direct payment made to others in the course of running a business, such as wage, rent and materials, which are those where no actual payment is made.

Question 42

implicit cost

Answer 42

The opportunity cost equal to what a firm must give up in order to use factor of production which it already owns and thus does not pay rent for.