Unit Five

Question 1

Explicit costs

Answer 1

Costs paid by a firm for inputs of production

Require actual dollars that are paid out

Question 2

Fixed costs

Answer 2

Costs a firm is committed to even if they are not producing any products
Fixed costs DO NOT vary as output increases/decreases

Question 3

Short-run

Answer 3

As long as one of the costs is fixed, the firm is operating in the short run
In the long run firms can adjust their fixed costs

Question 4

Variable cost

Answer 4

Costs that:
Increase with an increase in output
Decrease with a decrease in output

Question 5

Total cost

Answer 5

Total fixed cost + total variable cost

Question 6

Average fixed cost (AFC)

Answer 6

(Total fixed cost) / (output)

Question 7

Average variable cost (AVC)

Answer 7

(Total variable cost) / (output)

Question 8

Average total cost (ATC)

Answer 8

(Total cost) / (quantity)

Question 9

Marginal cost (MC)

Answer 9

(Change in total cost) / (change in output)

Question 10

Accounting profit

Answer 10

The profit used by accountants

(Total revenue) - (total explicit costs) = accounting profit

Question 11

Implicit costs

Answer 11

Opportunity costs of doing business
Forgone income that could be generated by
•the financial capital tied up in the business
•the proprietor or partner’s salaries at another job
These costs do not require an outlay of money by the firm

Question 12

Economic profit

Answer 12

(Total revenue) - (total explicit costs + total implicit costs)
(Accounting profit) - (implicit costs)

Question 13

Normal profit

Answer 13

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 14

Marginal product

Answer 14

The increase in output that arises from an additional increase in input

Question 15

Law of diminishing marginal returns

Answer 15

As you add inputs for production, the output gained from each input eventually decreases
Usually due to overcrowding
Aka diminishing marginal product

Question 16

Shape of the marginal cost curve

Answer 16

In the short run
MC initially decreases as workers get more productive (specialization)
MC increases as diminishing marginal returns kicks in
Curves down a little then curves up again

Question 17

Cost minimization rule

Answer 17

Firms will employ the input that gives them the most marginal productivity per dollar
MP / $
Firms will hire until
(MPl / $l) = (MPk / $k)

Question 18

Long run total cost curves

Answer 18

Long run total cost curves are u-shaped because of economies of scale, returns to scale, and diseconomies of scale

Question 19

Long run average cost curve

Answer 19

Curves down for a little, then levels out for a while, then curves up increasingly
Quantity produced on x axis, average cost per unit on y axis

Question 20

Economies of scale

Answer 20

First portion of long run average cost graph
Long run average total cost falls as the quantity increases
The firm can alter all inputs (none are fixed) to increase production while lowering costs
Firms keep most productive resources and cut waste

Question 21

Constant returns to scale

Answer 21

Second portion of graph (leveled out)
Long run average total cost stays the same as quantity of output changes
Depicts range of the lowest cost per unit
The firm has maximized use of its resources

Question 22

Diseconomies of scale

Answer 22

Long run average total cost rises as the quantity of output increases
Occurs because the firm has become too large (i. e. problems of efficiency, bureaucracy, etc.) or run out of productive resources

Question 23

Overcrowding

Answer 23

Too many laborers sharing a fixed input