Week 5: marginal values

Question 1

Profit

Answer 1

= TR - TC

Question 2

Revenue

Answer 2

the currency a firm receives in exchange for selling its output

Question 3

Total revenue

Answer 3

• if a firm sells all of its output at the same price, then TR = P * Q
• if a firm sells different categories of output at different prices, then TR = P1 Q1 + P2 Q2 + P3 Q3 + … Pn Qn

Question 4

Average revenue

Answer 4

• AR = TR / Q
• if a firm sells all products at the same price, then AR = TR / Q which works out to P * Q / Q = P
• expressed in terms of $ per unit

Question 5

Marginal revenue

Answer 5

• MR = ΔTR / ΔQ
• the additional revenue a firm receives for selling one additional unit of output
• MR < P, but…
• MR is only equal to price when a firm confronts a perfectly elastic demand curve
• expressed in terms of $ per unit

Question 6

Marginal Revenue in Perfect Competition Example

Answer 6

8 donuts at $2 each or 9 donuts at $2 each

MR = ΔTR / ΔQ
= ( 2.00 * 9 ) – ( 2.00 * 8 ) / 9 – 8
= 18 – 16 / 1
= $2.00

so you make an additional $2

Question 7

For perfect competition

Answer 7

MR = AR = P = D

Question 8

Costs in the Short Run

Answer 8

• fixed costs (costs of all fixed inputs)
• variable costs (costs of all variable inputs)
• total cost (fixed costs + variable costs)

Question 9

Total Cost

Answer 9

• Total Cost is f(Q)
• Total Fixed Cost (TFC) is constant/not f(Q)
• Total Variable Cost (TVC) is f(Q)
• TC = TFC + TVC

Question 10

Fixed costs

Answer 10

things you have to pay

ex. rent, loans

Question 11

Variable Costs

Answer 11

costs for inputs that vary at each quantity of output

ex. wages, materials

Question 12

FC Production curves

Answer 12

approaches zero but will never be zero

ex. on phone

Question 13

Per-Unit Costs

Answer 13

• Average Fixed Cost
• Average Variable Cost
• Average Total Cost

Question 14

Average Fixed Cost

Answer 14

AFC = FC / q
(fixed costs divided by total product)

Question 15

Average Variable Cost

Answer 15

AVC = VC / q
(variable costs divided by total product)

Question 16

Average Total Cost

Answer 16

• ATC = TC / q
(total cost divided by total product)
• ATC = AFC + AVC
(average fixed cost + average variable cost)

Question 17

ATC Decreases

Answer 17

• as output increases because fixed costs are getting distributed across more units
• at a certain point ATC will start to increase as the firm incurs more variable costs to increase production

Question 18

Production Curves of Per-Unit Costs

Answer 18

since AFC gets smaller and smaller with rising output, the gap between ATC and AVC will get smaller and smaller with rising output

Question 19

Marginal cost

Answer 19

• the extra cost of producing another unit of output
• MC = ΔTC / Δq
(the change in total cost divided by the change in total product)

Question 20

MC at low levels of output

Answer 20

may decrease as quantity increases; eventually MC will increase with output

Question 21

Marginal Cost Curve

Answer 21

shaped like “J” or nike sign bc of the law of diminishing marginal returns (look at graph from slides)

Question 22

Increasing returns to scale

Answer 22

output > inputs

Question 23

Constant returns to scale

Answer 23

output = inputs

Question 24

Decreasing returns to scale

Answer 24

output < inputs

Question 25

Causes of Increasing returns to scale

Answer 25

• division of labour
• specialized capital
• specialized management

Question 26

Cause of Constant returns to scale

Answer 26

whenever making more of a product means repeating exactly the same tasks

Question 27

Causes of Decreasing returns to scale

Answer 27

• management difficulties
• limited natural resources

Question 28

Curve of Increasing Returns to Scale

Answer 28

approaching zero

Question 29

Curve of Constant Returns to scale

Answer 29

horizontal

Question 30

Curve of Decreasing Returns to Scale

Answer 30

approaching infinity

Question 31

Efficient Scale of Production (or productive efficiency point)

Answer 31

quantity of output that minimizes average cost when MC and ATC intersect