Week 6 - Costs

Question 1

What are accounting costs?

Answer 1

Explicit costs

Question 2

What are economic costs?

Answer 2

Explicit costs + Opportunity costs (next best option)

Question 3

What are sunk costs?

Answer 3

unrecoverable expenses that have already occurred

Question 4

What is the last dollar rule?

Answer 4

Pick a bundle where the last dollar spent on one input gives as much extra output as the last dollar spent on another

Question 5

What is the Tangency rule?

Answer 5

Pick a bundle of inputs where the isoquant is tangent to isoquant line

Question 6

What is the lowest isocost rule?

Answer 6

Pick a bundle of inputs where the lowest isocost line touches the isoquant

Question 7

What is a isocost line?

Answer 7

The line of choices between mixs of capital and labour
- The same as a budget line

Question 8

What is the isocost equation?

Answer 8

TC = wL + rK

Question 9

How does a per product tax effect cost curves?

Answer 9

increases AVC and MC (shifts curves)
- Gap between old and new = tax amount

Question 10

How does a tax of fix costs effect cost curves?

Answer 10

Increases AFV (shifts curve)
- Gap between old and new = tax

Question 11

What is the cost equation?

Answer 11

TC = FC + VC or TC/q = FC/q + VC/q

Question 12

What is the MC equation?

Answer 12

MC = dTC/dq = d(FC+VC)/dq = dFC/dq + dVC/dq

Question 13

What is the average cost equation?

Answer 13

AC = TC/q = FC/q + VC/q = AFC + AVC

Question 14

Where does MC interest AVC and ATC?

Answer 14

MC intersects at the lowest points of ATC & AVC curves

Question 15

What is the key assumption of short-Run costs?

Answer 15

At least one cost is held constant

Question 16

What is the assumption of Long-Run costs?
When do costs enter the long-run?

Answer 16

Both capital and labour are variable

Once both costs are variable

Question 17

What happens to the isocost line when an input price changes?

Answer 17

It shifts to become tangent with isoquant

Question 18

Where do the long run cost curves intersect?

Answer 18

LRMC interests LRAC at lowest point

*same as short-run

Question 19

What is the relationship between LRAC and LRVC?

Answer 19

LRAC = LRVC

Question 20

What is an economy of scale?

Answer 20

Average cost of production falls as output increases

Question 21

What is “no Economies of scale”

Answer 21

no change in average cost

Question 22

What is “diseconomies of scale”

Answer 22

When average cost increases as output increases

Question 23

What is “economies of scope”?

Answer 23

When it is cheaper to produce two goods together rather than separate