Chapter 6

Question 1

Firm

Answer 1

any business entity that produces and sells goods or services.

Question 2

Production

Answer 2

the process by which the transformation of inputs to outputs occurs.

Question 3

Physical Capital

Answer 3

any good, including machines and buildings, used for production.

Question 4

The Short Run

Answer 4

a period of time when only some of a firm’s inputs can be varied.

Question 5

The Long Run

Answer 5

a period of time when all of a firm’s inputs can be varied.

Question 6

A Fixed Factor of Production

Answer 6

an input that cannot be changed in the short run.

Question 7

A Variable Factor of Production

Answer 7

an input that can be changed in the short run.

Question 8

Marginal Production

Answer 8

the change in total output associated with using one more unit of input.

Question 9

Specialization

Answer 9

the result of workers developing a certain skill set in order to increase total productivity.

Question 10

The Law of Diminishing Returns

Answer 10

states that successive increases in inputs eventually lead to less additional output.

Question 11

The Cost of Production

Answer 11

what a firm must pay for its inputs.

Question 12

Total Cost

Answer 12

the sum of variable and fixed costs.

Question 13

A Variable Cost (VC)

Answer 13

the cost of variable factors of production, which change along with a firm’s output.

Question 14

A Fixed Cost (FC)

Answer 14

the cost of fixed factors of production, which a firm must pay even if it produces zero output.

Question 15

Average Total Cost (ATC)

Answer 15

the total cost divided by the total output.

Question 16

Average Variable Cost (AFC)

Answer 16

the total fixed cost divided by the total output.

Question 17

Marginal Cost (MC)

Answer 17

the change in total cost associated with producing one more unit of output. ( = Change is the total cost divided by change in output)

Question 18

Revenue

Answer 18

the amount of money the firm brings in from the sale of outputs. (Total Revenue = price times quantity sold)

Question 19

Marginal Revenue (MR)

Answer 19

the change in total revenue associated with producing one more unit of output.

Question 20

The Profits

Answer 20

a firm are equal to its revenues minus its costs.

Question 21

Accounting Profits

Answer 21

equal to total revenue minus explicit costs.

Question 22

Economic Profits

Answer 22

equal to total revenue minus both explicit and implicit costs.

Question 23

Price Elasticity of Supply

Answer 23

the measure of how responsive quantity supplied is to price changes.

Question 24

Shutdown

Answer 24

a short-run decision to not produce anything during a specific period.

Question 25

Sunk Cost

Answer 25

costs that, once committed, can never be recovered and should not affect current and future production decisions.

Question 26

Producer Surplus

Answer 26

the difference between the market price and the marginal cost curve.

Question 27

Economies of Scale

Answer 27

occurs when ATC falls as the quantity produced increases.

Question 28

Constant Returns to Scale

Answer 28

exist when ATC does not change as the quantity produced changes.

Question 29

Diseconomies of Scale

Answer 29

occur when ATC rises as the quantity produced increases.

Question 30

Exit

Answer 30

a long-run decision to leave the market.

Question 31

Free Entry

Answer 31

an industry when entry is unfettered by any spe- cial legal or technical barriers.

Question 32

Free Exit

Answer 32

an industry when exit is unfettered by any special legal or technical barriers.