Costs

Question 1

What two types of costs do firms have?

Answer 1

1) Fixed costs.
2) Variable costs.

Question 2

What are costs of production?

Answer 2

The cost of producing output. This refers to monetary cost of the factors of production, as well as opportunity cost of production.

Question 3

What are fixed costs?

Answer 3

Costs that do not change as output changes. E.g. rent and salaries.

Question 4

What are variable costs?

Answer 4

Costs that change with output. E.g. raw materials and packaging.

Question 5

What is total cost (TC)?

Answer 5

The costs involved in producing a certain level of output.

Question 6

What is total fixed cost (TFC)?

Answer 6

The part of total cost that does not vary with output.

Question 7

What is total variable cost (TVC)?

Answer 7

The part of total costs that vary with levels of output.

Question 8

What is average cost (AC)?

Answer 8

The cost per unit produced.

Question 9

What is the formula for average cost (AC)?

Answer 9

AC = TC ÷ Q
Average costs = total cost ÷ output produced

Question 10

What is average fixed cost (AFC)?

Answer 10

The total fixed cost per unit of output.

Question 11

What is the formula for average fixed cost (AFC)?

Answer 11

AFC = TFC ÷ Q
Average fixed cost = Total fixed cost ÷ output

Question 12

What is average variable cost (AVC)?

Answer 12

The total variable cost per unit of output.

Question 13

What is the formula for average variable cost (AVC)?

Answer 13

AVC = TVC ÷ Q
Average variable cost = total variable cost ÷ output

Question 14

What is marginal cost (MC)?

Answer 14

The cost of producing one more unit of output.

Question 15

What is the formula for marginal cost (MC)?

Answer 15

MC = ΔTC ÷ ΔQ
Marginal cost = change in total cost ÷ change in output

Question 16

Are costs variable or fixed in the short-run?

Answer 16

Fixed.

Question 17

What is the short-run?

Answer 17

The period of time when at least one factor of production is fixed. It is not a fixed period of time, and can vary in-between industries.

Question 18

Explain the TFC curve in the short-run.

Answer 18

A straight, horizontal line, showing that as output increases, TFC remains unchanged in the SR.

Question 19

Explain the TC curve in the short-run.

Answer 19

A line that rises as output rises, because as output rises, TVC increase, increasing TC.

Question 20

Explain the TVC curve in the short-run.

Answer 20

A line that rises as output increases, but is below the TC curve.

Question 21

What is the assumption of diminishing marginal productivity/the law of diminishing returns?

Answer 21

At a certain point, increasing a variable factor of production will eventually lead to a smaller output.

Question 22

Where is the point of diminishing marginal productivity on the SR cost curve?

Answer 22

The point at which the MC curve begins to rise.

Question 23

Explain the AC curve in the short-run.

Answer 23

It is U-shaped, with the AC curve originally falling as output increases because additional variable factor inputs lead to greater output at lower average cost. AC eventually starts to increase as MC rises.

Question 24

At what point does the MC curve always intersect the AC curve?

Answer 24

At the lowest point of the AC curve.