UGBA 101A Week Seven & Eight: The Cost of Production Flashcards
amortization
policy of treating a one-time expenditure as an annual cost spread out over some number of years
marginal cost
increase in cost resulting from the production of one extra unit of output
how to calculate marginal cost
because fixed cost does not change as the firm’s level of output changes, marginal cost is equal to the increase in variable cost or the increase in total cost that results from an extra unit of output. marginal cost can be written as:
MC = ΔVC / Δq = ΔTC / Δq
or
MC=w/ MPL
average total cost
firm’s total cost divided by its level of output
average fixed cost
fixed cost divided by the level of output
average variable cost
variable cost divided by the level of output
change in variable cost
per-unit cost of the extra labor w times the amount of extra labor needed to produce the extra output delta L
∆VC=w∆L/ ∆q
it follows that MC = ΔVC / Δq = w ΔL / Δq
diminishing marginal returns and marginal cost
Diminishing marginal returns means that the marginal product of labor declines as the quantity of labor employed increases.
As a result, when there are diminishing marginal returns, marginal cost will increase as output increases.
what does the marginal cost curve look like
a nike tick kinda
where does marginal cost cross the average variable cost and average total cost curves?
at their minimum points (could be different between AVC and ATC)
the vertical distance between the ATC and AVC curves ______ as output increases
why?
Because average total cost is the sum of average variable cost
and average fixed cost and the A F C curve declines
everywhere, the vertical distance between the A T C and A V C
curves decreases as output increases.
user cost of capital
Annual cost of owning and using a capital asset, equal to
economic depreciation plus forgone interest
User Cost of Capital =Economic Depreciation + (Interest Rate)(Value of
Capital)
We can also express the user cost of capital as a rate per dollar of capital:
r = Depreciation rate + Interest rate
rental rate Cost per year of renting one unit of capital.
If the capital market is competitive, the rental rate should be ____
to the user cost, r.
equal
Why?
Firms that own capital expect to earn a competitive return when
they rent it. This competitive return is the user cost of capital.
Capital that is purchased can be treated as though it were rented at
a rental rate equal to the user cost of capital
1) Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while
Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the
lower costs?
A) Fly Right.
B) Fly by Night
C) Neither the costs are identical.
D) Neither, Fly by Night has lower costs at small output
levels and Fly Right has lower costs at high output levels
C) Neither the costs are identical.
For Fly Right:
Explicit cost: $0 per year (since the airplane is already purchased, there’s no annual cost explicitly attributed to operating the plane for this scenario; however, maintenance and other operational costs might exist, which are not specified here).
Opportunity cost: $30,000 per year (the amount Fly Right would earn if it rented out its plane to another airline).
For Fly by Night:
Explicit cost: $30,000 per year (the cost of renting the plane).
Opportunity cost: $0 (since the plane is rented, there’s no foregone income from not renting it out).
consider both opportunity and explicit costs
2) Which of the following
statements is true regarding the
differences between economic and
accounting costs?
A) Accounting costs include all implicit and explicit costs.
B) Economic costs include implied costs only.
C) Accountants consider only implicit costs when calculating costs.
D) Accounting costs include only explicit costs.
D) Accounting costs include only explicit costs.
Explicit costs are direct, out-of-pocket payments for resources (e.g., wages, rent, materials).
Implicit costs, also known as opportunity costs, represent the income a firm foregoes by using resources it already owns for its current purposes rather than renting, selling, or employing them in the best alternative way.
A) is incorrect because accounting costs typically do not include implicit costs; they mainly focus on explicit costs.
B) is incorrect because economic costs include both implicit (implied) and explicit costs, not just implicit costs.
C) is incorrect as accountants primarily consider explicit costs, not implicit costs, when calculating costs.
D) is correct because accounting costs include only explicit costs. Accounting does not take into account the opportunity costs (implicit costs) associated with using resources in a certain way instead of the next best alternative.
