chap 10

Question 1

Accounting Profit

Answer 1

Accountants measure a firm’s profit to ensure that the firm pays the correct amount of tax and to show it investors how their funds are being used.
Profit equals total revenue minus total cost.

Question 2

Economic profit calculation

Answer 2

total revenue minus total cost, with total cost measured as the opportunity cost of production.

Question 3

A Firm’s Opportunity Cost of Production

Answer 3

A firm’s opportunity cost of production is the value of the best alternative use of the resources that a firm uses in production.

Question 4

Resources Bought in the Market

Answer 4

The amount spent by a firm on resources bought in the market is an opportunity cost of production because the firm could have bought different resources to produce some other good or service.

Question 5

Resources Owned by the Firm

Answer 5

If the firm owns capital and uses it to produce its output, then the firm incurs an opportunity cost.
The firm incurs an opportunity cost of production because it could have sold the capital and rented capital from another firm.
The firm implicitly rents the capital from itself.

Question 6

implicit rental rate

Answer 6

The firm’s opportunity cost of using the capital it owns is called the implicit rental rate of capital.

Question 7

The implicit rental rate of capital is made up of

Answer 7

Economic depreciation
Interest forgone

Question 8

Economic depreciation

Answer 8

the change in the market value of capital over a given period.

Question 9

Interest forgone

Answer 9

the return on the funds used to acquire the capital.

Question 10

Resources Supplied by the Firm’s Owner

Answer 10

The owner might supply both entrepreneurship and labour.
The return to entrepreneurship is profit.

Question 11

normal profit.

Answer 11

The profit that an entrepreneur can expect to receive on average is called normal profit.

Question 12

Normal profit calculation

Answer 12

Normal profit is the cost of entrepreneurship and is an opportunity cost of production.

Question 13

All decisions can be placed in two time frames:

Answer 13

The short run
The long run

Question 14

The Short Run

Answer 14

The short run is a time frame in which the quantity of one or more resources used in production is fixed.
For most firms, the capital, called the firm’s plant, is fixed in the short run.
Other resources used by the firm (such as labour, raw materials, and energy) can be changed in the short run.
Short-run decisions are easily reversed.

Question 15

The Long Run

Answer 15

The long run is a time frame in which the quantities of all resources—including the plant size—can be varied.
Long-run decisions are not easily reversed.

Question 16

sunk cost

Answer 16

A sunk cost is a cost incurred by the firm and cannot be changed.
If a firm’s plant has no resale value, the amount paid for it is a sunk cost.
Sunk costs are irrelevant to a firm’s current decisions.

Question 17

Three concepts describe the relationship between output and the quantity of labour employed:

Answer 17

Total product
Marginal product
Average product

Question 18

Total product

Answer 18

Total product is the total output produced in a given period.

Question 19

marginal product

Answer 19

The marginal product of labour is the change in total product that results from a one-unit increase in the quantity of labour employed, with all other inputs remaining the same.

Question 20

average product

Answer 20

The average product of labour is equal to total product divided by the quantity of labour employed.

Question 21

As the quantity of labour employed increases what happens to the relationship between the output and the quantity of labour

Answer 21

Total product increases.
Marginal product increases initially … but eventually decreases.
Average product decreases.

Question 22

Product Curves

Answer 22

Product curves show how the firm’s total product, marginal product, and average product change as the firm varies the quantity of labour employed.

Question 23

Total Product Curve

Answer 23

The total product curve shows how total product changes with the quantity of labour employed.
The total product curve is similar to the PPF.
It separates attainable output levels from unattainable output levels in the short run.

Question 24

Marginal Product Curve

Answer 24

the marginal product of labour curve and how the marginal product curve relates to the total product curve.

Question 25

Almost all production processes are like the one shown here and have:

Answer 25

Increasing marginal returns initially Diminishing marginal returns eventually

Question 26

Increasing Marginal Returns

Answer 26

Initially, the marginal product of a worker exceeds the marginal product of the previous worker. The firm experiences increasing marginal returns.

Question 27

Diminishing Marginal Returns

Answer 27

Eventually, the marginal product of a worker is less than the marginal product of the previous worker. The firm experiences diminishing marginal returns.

Question 28

law of diminishing returns

Answer 28

As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes.

Question 29

Average Product Curve

Answer 29

When marginal product exceeds average product, average product increases. When marginal product is below average product, average product decreases. When marginal product equals average product, average product is at its maximum.

Question 30

Three cost concepts and three types of cost curves are

Answer 30

Total cost Marginal cost Average cost

Question 31

Total Cost

Answer 31

A firm’s total cost (TC) is the cost of all resources used.

Question 32

total cost calc

Answer 32

TC = TFC + TVC

Question 33

Total fixed cost

Answer 33

Total fixed cost (TFC) is the cost of the firm’s fixed inputs. Fixed costs do not change with output.

Question 34

Total variable cost

Answer 34

Total variable cost (TVC) is the cost of the firm’s variable inputs. Variable costs do change with output.

Question 35

total costs changes in output

Answer 35

Total fixed cost is the same at each output level. Total variable cost increases as output increases. Total cost, which is the sum of TFC and TVC also increases as output increases.

Question 36

Marginal cost

Answer 36

Marginal cost (MC) is the increase in total cost that results from a one-unit increase in total product.

Question 37

Average Cost

Answer 37

Average cost measures can be derived from each of the total cost measures:

Question 38

Average fixed cost

Answer 38

Average fixed cost (AFC) is total fixed cost per unit of output.

Question 39

Average Variable cost

Answer 39

Average variable cost (AVC) is total variable cost per unit of output.

Question 40

Average total cost

Answer 40

Average total cost (ATC) is total cost per unit of output.

Question 41

Average total cost calc

Answer 41

ATC = AFC + AVC.

Question 42

Why the Average Total Cost Curve Is U-Shaped

Answer 42

The ATC curve is the vertical sum of the AFC curve and the AVC curve.

Question 43

The U-shape of the ATC curve arises from the influence of two opposing forces:

Answer 43

Spreading total fixed cost over a larger output—AFC curve slopes downward as output increases. Eventually diminishing returns—the AVC curve slopes upward and AVC increases more quickly than AFC is decreasing.

Question 43

The U-shape of the ATC curve arises from the influence of two opposing forces:

Answer 43

Spreading total fixed cost over a larger output—AFC curve slopes downward as output increases. Eventually diminishing returns—the AVC curve slopes upward and AVC increases more quickly than AFC is decreasing.

Question 44

Average and Marginal Product and Cost

Answer 44

The shapes of a firm’s cost curves are determined by the technology it uses: MC is at its minimum at the same output level at which MP is at its maximum. When MP is rising, MC is falling. AVC is at its minimum at the same output level at which AP is at its maximum. When AP is rising, AVC is falling.

Question 45

Shifts in the Cost Curves

Answer 45

The position of a firm’s cost curves depend on two factors: Technology Prices of factors of production

Question 46

Technology

Answer 46

Technological change influences both the product curves and the cost curves. An increase in productivity shifts the product curves upward and the cost curves downward. If a technological advance results in the firm using more capital and less labour, fixed costs increase and variable costs decrease. In this case, average total cost increases at low output levels and decreases at high output levels.

Question 47

Prices of Factors of Production

Answer 47

An increase in the price of a factor of production increases costs and shifts the cost curves. An increase in a fixed cost shifts the total cost (TC) and average total cost (ATC) curves upward but does not shift the marginal cost (MC) curve. An increase in a variable cost shifts the total cost (TC), average total cost (ATC), and marginal cost (MC) curves upward.

Question 48

The Production Function

Answer 48

The firm’s production function is the relationship between the maximum output attainable and the quantities of both capital and labour.

Question 49

long-run average cost curve

Answer 49

the relationship between the lowest attainable average total cost and output when both the plant and labour are varied. The long-run average cost curve is a planning curve that tells the firm the plant that minimizes the cost of producing a given output range. Once the firm has chosen its plant, the firm incurs the costs that correspond to the ATC curve for that plant.

Question 50

Economies of scale

Answer 50

features of a firm’s technology that lead to falling long-run average cost as output increases.

Question 51

Diseconomies of scale

Answer 51

features of a firm’s technology that lead to rising long-run average cost as output increases.

Question 52

Constant returns to scale

Answer 52

features of a firm’s technology that lead to constant long-run average cost as output increases.

Question 53

Minimum efficient scale

Answer 53

the smallest quantity of output at which the long-run average cost reaches its lowest level. If the long-run average cost curve is U-shaped, the minimum point identifies the minimum efficient scale output level.

Question 54

Minimum efficient scale

Answer 54

the smallest quantity of output at which the long-run average cost reaches its lowest level. If the long-run average cost curve is U-shaped, the minimum point identifies the minimum efficient scale output level.