Unit 5

Question 1

Explicit cost

Answer 1

Costs paid by a firm for inputs of production
Require actually money paid
Land, labor, capital

Question 2

Two types of explicit costs

Answer 2

Fixed and variable

Question 3

Fixed cost

Answer 3

Doesn’t change
Costs a firm is committed to even if they are not producing any products
Ex. Rent, employees, securities, loans to buy machines

Question 4

Fixed costs in the short and long run

Answer 4

SHORT RUN: if one of the costs is fixed, the firm is operating in the short run
LONG RUN: firms can adapt their costs

Question 5

Variable costs

Answer 5

Costs that change
Increase with an increase in output, decrease with a decrease in output
Ex. Lemons in a lemonade stand, electricity for store, ingredients for food

Question 6

Economic profit

Answer 6

Total revenue-implicit and explicit costs (opportunity cost) of goods and services being produced

Question 7

Accounting profit

Answer 7

Total revenue-explicit costs

Question 8

Implicit cost

Answer 8

Do not require an outlay of cash by the firm

Opportunity costs of doing business

Question 9

Normal profit

Answer 9

exists when economic profit is ZERO or a firm is just covering its explicit and implicit costs
The firm would be said to be earning a Normal profit if it’s accounting profit equaled its implicit costs

Question 10

Production function

Answer 10

The relationship between quantity of inputs used to make a good and the quantity of output of that good

Question 11

Marginal product

Answer 11

The increase in output that arises from an additional unit of input
Change in total cost/Change in output

Question 12

Diminishing marginal product

Answer 12

As the marginal product of an input declines, the quantity of the input increaes

Question 13

Average total cost

Answer 13

Total cost/quantity of output

Question 14

Average fixed cost

Answer 14

Fixed cost/quantity of output

Question 15

Average variable cost

Answer 15

Variable cost/quantity of output

Question 16

Marginal cost

Answer 16

Increase in total cost from each unit of production

Question 17

Shape of marginal cost curve

Where does it cross the ATC and AVC curves?

Answer 17

Increases
With more output, more money is made. Cost rises with output
Crosses with ATC and AVC curves at their MINIMUM points

Question 18

Shape of ATC curve

Why is it this shape?

Answer 18

U shaped, because ATC is the sum of AFC and AVC. AFC always declines as output rises because fixed cost is getting spread over many units. At low levels of output, ATC is high because the fixed cost is only spread across a few units. ATC declines as output increases. At a certain point, ATC rises because AVC begins rising.

Question 19

Short run ATC curve

Answer 19

Small increasing and decreasing curves

Question 20

Long run ATC curve

Answer 20

Long and flat

Question 21

Economies of scale

Answer 21

When long run average total cost declines as output increases
The firm can alter all inputs (none) are fixed
Firms keep most productive resources and cut waste

Question 22

Constant returns to scale

Answer 22

Long run ATC stays the same as quantity of output changes
Firm has maximized resources
Depicts range of lowest cost per unit

Question 23

Diseconomies of scale

Answer 23

Long run ATC rises as quantity of output changes
Occurs because the firm has become too large (ex. Problems of efficiency, bureaucracy, etc.) or run out of productive resources