CH7: Cost of Production

Question 1

How are total, average, and marginal cost calculated?

Answer 1

TC = Fixed Cost + Variable Cost. / The total cost of producing a specific quantity of output. / AC = Total Cost ÷ Output. / AC = TC ÷ Quantity. / MC = Change in total cost ÷ Change in quantity produced.

Question 2

How are total, average, and marginal revenue calculated?

Answer 2

TR = Price × Quantity sold. / AR = Total Revenue ÷ Quantity sold. / The additional revenue from selling one extra unit.

Question 3

What characterizes the long-run production period?

Answer 3

All inputs are variable.

Question 4

What characterizes the short-run production period?

Answer 4

At least one input is fixed. / A period during which at least one input is fixed.

Question 5

What is a firm in economics?

Answer 5

A profit-seeking business that provides goods or services.

Question 6

What is economic profit?

Answer 6

TR – (Explicit + Implicit Costs), including normal profit.

Question 7

What is normal profit?

Answer 7

The minimum return needed to keep resources in their current use; part of cost.

Question 8

What is the primary goal of a firm in economics?

Answer 8

To maximize profit.

Question 9

What is the principal-agent problem?

Answer 9

A conflict where agents (e.g., managers) pursue goals not aligned with principals (e.g., owners).

Question 10

how is average fixed cost (afc) calculated?

Answer 10

AFC = Fixed Cost ÷ Output.

Question 11

how is average product (ap) calculated?

Answer 11

AP = Total Product ÷ Units of Labour.

Question 12

how is average variable cost (avc) calculated?

Answer 12

AVC = Variable Cost ÷ Output.

Question 13

what are explicit costs?

Answer 13

Direct monetary payments for inputs.

Question 14

what are implicit costs?

Answer 14

Opportunity costs for using self-owned resources.

Question 15

what does the law of diminishing returns state?

Answer 15

As more of a variable input is added to fixed inputs, the marginal product will eventually decline.

Question 16

what happens to ap when mp is above it?

Answer 16

AP increases.

Question 17

what happens to tp when mp becomes negative?

Answer 17

TP begins to decline.

Question 18

what happens when mc = ac?

Answer 18

Average cost remains unchanged.

Question 19

what happens when mc > ac?

Answer 19

Average cost increases.

Question 20

what is accounting profit?

Answer 20

TR – Explicit Costs.

Question 21

what is average product (ap)?

Answer 21

AP = TP ÷ Input quantity.

Question 22

what is economic cost?

Answer 22

Economic cost = Explicit costs + Implicit costs.

Question 23

what is fixed cost (fc)?

Answer 23

Cost that does not vary with output.

Question 24

what is marginal product (mp)?

Answer 24

The additional output from using one more unit of input.

Question 25

what is profit?

Answer 25

Profit = Total Revenue – Total Cost.

Question 26

what is the difference between variable and fixed inputs?

Answer 26

Variable inputs change with output; fixed inputs stay constant in the short run.

Question 27

what is the law of diminishing returns?

Answer 27

MP decreases as more units of a variable input are added to fixed inputs.

Question 28

what is the production function?

Answer 28

A mathematical relationship showing how inputs (e.g., labour and capital) are converted into output: Q = f(L, K).

Question 29

what is total product (tp)?

Answer 29

The total output produced from inputs.

Question 30

what is variable cost (vc)?

Answer 30

Cost that varies directly with output.

Question 31

when is ap at its maximum?

Answer 31

When AP = MP.

Question 32

why is the utility approach useful in understanding firm behavior?

Answer 32

It explains how consumers make choices to maximize satisfaction under constraints.