Week 5: Cost & Profits

Question 1

According to the law of supply

Answer 1

firms are willing to produce and sell a greater quantity of a good when the
price of the good is higher.
This results in a supply curve that slopes upward.

Question 2

The economic goal of the firm is to

Answer 2

maximise profits.

Question 3

Total revenue is the

Answer 3

total amount (in $) a firm receives for the sale of its output.

Question 4

Total cost is the

Answer 4

total amount (in $) a firm pays to purchase the inputs into production.

Question 5

Profit is the

Answer 5

firm’s total revenue minus its total cost.

Question 6

Profit =

Answer 6

Total Revenue - Total Cost

Question 7

A firms cost of production include

Answer 7

explicit and implicit costs.

Question 8

Explicit costs are

Answer 8

input costs that require a direct outlay of money by the firm

Question 9

Implicit costs are

Answer 9

input costs that do not require an outlay of money by the firm
- Using own money rather than taking a loan and paying interest (opportunity cost of interest foregone) - Not paying yourself a wage while you get set up (opportunity cost of your time)

Question 10

Economists measure a firms

Answer 10

conomic profit as total revenue minus total costs, including both explicit
and implicit costs (including ‘normal profit’ - the return to the entrepreneur).

Question 11

Accountants measure

Answer 11

he accounting profit as the firm’s total revenue minus only the firm’s explicit costs.

Question 12

When total revenue exceeds both explicit and implicit costs, the firm earns

Answer 12

economic profit

Question 13

Economic profit is ____ than accounting profit

Answer 13

smaller

Question 14

The production function shows

Answer 14

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

Question 15

The marginal product of any input in the production process is the

Answer 15

addition to output that arises from an

additional unit of that input.

Question 16

Diminishing marginal product is the

Answer 16

property whereby the marginal product of an input declines as the
quantity of the input increases.

Question 17

Example of diminishing marginal product:

Answer 17

As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment.

Question 18

Cost of production may be divided into two types:

Answer 18

Fixed and Variable Costs

Question 19

Fixed costs are

Answer 19

those costs that do not vary with the quantity of output reached

Question 20

Variable costs are

Answer 20

those costs that do vary with the quantity of output reached

Question 21

Total Cost +

Answer 21

Total Fixed Costs + Total Variable Cost

Question 22

Marginal Cost measures

Answer 22

the increase in total cost that arises from an extra unit of production.

Question 23

Marginal Cost +

Answer 23

Change in total cost / Change in Quantity

Question 24

Marginal costs ___ with the amount of output produces.

Answer 24

Rise

Question 25

3 Important Properties of cost curves:

Answer 25

• Marginal cost eventually rises with the quantity of output
• The average-total-cost curve is U-shaped
• The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost

Question 26

Economies of scale refer

Answer 26

to the property whereby long-run average total cost falls as the quantity of output
increases.

Question 27

Diseconomies of scale refer

Answer 27

to the property whereby long-run average total cost rises as the quantity of output increases.

Question 28

Constant returns to scale refers

Answer 28

to the property whereby long-run average total cost stays the same as the quantity of output changes.