Chapter 13: The Costs of Production

Question 1

Define ‘Total revenue (for a firm)’.

Answer 1

The amount a firm receives for the sale of its outputs.

Question 2

Define ‘Total cost’.

Answer 2

The market value of the inputs a firm uses in production.

Question 3

Define ‘Profit’.

Answer 3

Total revenue minus total cost.

Question 4

Define ‘Explicit costs’.

Answer 4

Input costs that require an outlay of money by the firm.

I.e. wages paid to workers.

Question 5

Define ‘Implicit costs’.

Answer 5

Input costs that do not require an outlay of money by the firm.
I.e. wages given up by not doing another job.

Question 6

Define ‘Economic profit’.

Answer 6

Total revenue minus total cost, including both explicit and implicit costs.

Question 7

Define ‘Accounting profit’.

Answer 7

Total revenue minus total explicit cost.

Question 8

Define ‘Production function’.

Answer 8

The relationship between quantity of inputs used to make a good and the quantity of output of that good.

Question 9

Define ‘Marginal product’.

Answer 9

The increase in output that arises from an additional unit in input.

Question 10

Define ‘Diminishing marginal product’.

Answer 10

The property whereby the marginal product of an input declines as the quantity of the input increases.

Question 11

Define ‘Fixed costs (FC)’.

Answer 11

Costs that do not vary with the quantity of output produced.

Question 12

Define ‘Variable costs (VC)’.

Answer 12

Costs that do vary with the quantity of output produced.

Question 13

Define ‘Average total cost (ATC)’.

Answer 13

Total costs divided by the quantity of output.

Question 14

Define ‘Average fixed cost (AFC)’.

Answer 14

Fixed costs divided by the quantity of output.

Question 15

Define ‘Average variable cost (AVC)’.

Answer 15

Variable costs divided by the quantity of output.

Question 16

Define ‘Marginal cost (MC)’.

Answer 16

The increase in total cost that arises from as extra unit of production.

Question 17

Define ‘Efficient scale’.

Answer 17

The quantity of output that minimizes average total cost.

Question 18

Define ‘Economies of scale’.

Answer 18

The property whereby long-run average total cost falls as the quantity of output increases.

Question 19

Define ‘Diseconomies of scale’.

Answer 19

The property whereby long-run average total cost rises as the quantity of output increases.

Question 20

Define ‘Constant returns of scale’.

Answer 20

The property whereby long-run average total cost stays the same as the quantity of output changes.

Question 21

What are the equations for the many types of costs?

Answer 21

TC = FC + VC
AFC = FC / Q
AVC = VC / Q
ATC = TC / Q
MC = ΔTC / ΔQ

Question 22

The goal of firms is to…?

Answer 22

Maximise profit.

Question 23

A firms costs reflect its production process. A typical firm’s ___ ___ gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product. As a result, a firm’s ___-___ ___ gets steeper as the quantity produced rises.

Answer 23

Production function.

Total-cost curve.

Question 24

When analyzing firm behavior, it is often useful to graph average total cost and marginal cost. For a typical firm, marginal cost ___ with the quantity of output. Average total cost first ___ as output increases and then ___ as output increases further. The marginal-cost curve always crosses the average-total-cost curve at the ___ of average total cost.

Answer 24

Rises.
Falls, then rises.
Minimum.

Question 25

A firm’s costs often depend on the time horizon being considered. In particular, many costs are ___ in the short run but ___ in the long run. As a result, when the firm changes its level of production, average total cost may rise more in the short run than in the long run.

Answer 25

Fixed and variable.