Unit 7: Production & Cost in the Firm

Question 1

Explicit Cost

Answer 1

Opportunity cost of resources employed by a firm that takes the form of cash payments

Question 2

Implicit Cost

Answer 2

A firm’s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

Question 3

Accounting Profit

Answer 3

A firm’s total revenue minus its explicit costs

Question 4

Economic Profit

Answer 4

A firm’s total revenue minus its explicit and implicit costs

Question 5

Normal Profit

Answer 5

The accounting profit earned when all resources earn their opportunity cost

Question 6

Variable Resources

Answer 6

Any resource that can be varied in the short run to increase or decrease production Ex. Labor

Question 7

Fixed Resources

Answer 7

Any resource that cannot be varied in the short run

Question 8

Short Run

Answer 8

A period during which at least one of a firm’s resources is fixed - 3 months

Question 9

Long Run

Answer 9

A period during which all resources under the firm’s control are variable - 1 year

Question 10

Total Product

Answer 10

The total output produced by a firm

Question 11

Production Function

Answer 11

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology

Question 12

Marginal Product

Answer 12

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

Question 13

Increasing Marginal Returns

Answer 13

The marginal product of a variable resource increases as each additional unit of that resource is employed

Question 14

Law of Diminishing Marginal Returns

Answer 14

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

Question 15

Fixed Cost

Answer 15

Any production cost that is independent of the firm’s rate of output

Question 16

Variable Cost

Answer 16

Any production cost that changes as the rate of output changes

Question 17

Total Cost

Answer 17

The sum of fixed cost and variable cost or TC=FC+VC

Question 18

Average Variable Cost

Answer 18

Variable cost divided by output, VC/q

Question 19

Average Total Cost

Answer 19

Total cost divided by output, TC/q, or average fixed cost and average variable cost , ATC=AFC+AVC

Question 20

Long-Run Average Cost Curve

Answer 20

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

Question 21

Economies of Scale

Answer 21

Forces that reduce a firm’s average cost as the scale of operation increases in the long run

Question 22

Diseconomies of Scale

Answer 22

Forces that may eventually increase a firm’s average cost as the scale of operation increases in the long run

Question 23

Constant Long-Run Average Cost

Answer 23

A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size

Question 24

Production Function

Answer 24

Identifies the maximum qualities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology

Question 25

Marginal Rate of Technical Substitution (MRTS)

Answer 25

The rate at which labor substitutes for capital without affecting output
slope = wage/rent

Question 26

Isoquant Curve

Answer 26

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output

Question 27

Isocost Line

Answer 27

Identifies all combinations of capital and labor the firm can hire for a given total cost

Question 28

Expansion Path

Answer 28

The line formed by connecting tangency points