Chapter 2: Book Outline

Question 1

Cost is __

Answer 1

an action, not a price.

Question 2

Cost should always be viewed as

Answer 2

opportunity cost

Question 3

Cost is AKA

Answer 3

next best alternative

Question 4

To be economically profitable

Answer 4

you need to go beyond ensuring that revenues exceed costs; you must deliver a profit that outperforms the next best alternative of the resources you utilize.

Question 5

It is rare to find

Answer 5

economic profit AKA pure profit opportunities

Question 6

Law of Diminishing Returns

Answer 6

states that as more and more units of a variable resource are combined with a fixed number of another resource then using additional units of the variable resource will eventually increase output at a decreasing rate.

Question 7

Diminishing returns will mean that there’s a point at which an additional unit means

Answer 7

the marginal product is at its peak, and beyond that a point at which marginal product is zero.

Question 8

If MC is

Answer 8

AC must fall. Diminishing returns means that eventually marginal costs will begin to rise so eventually average costs will.

Question 9

Fixed Cost

Answer 9

cost that is fixed with respect to changes in output

Question 10

Variable cost

Answer 10

is one that varies with respect to output

Question 11

sunk cost

Answer 11

Incurred due to an irreversible decision that turns out to be mistake.

Question 12

Sunk Cost Fallacy

Answer 12

confront sunk costs means that you’re admitting to previous error - its easier to buy time in hope that mistake is not mistake, rather than admit to them and move on

Question 13

Variable costs

Answer 13

should be focus of attention

Question 14

Shut Down Condition

Answer 14

refers to the claim that a business unit should be open provided it can cover its variable costs

Question 15

Transferred costs - “Externalities”

Answer 15

refer to situation where the decision maker doesn’t bear the full cost of their actions

Question 16

As output increases

Answer 16

average fixed costs will fall

Question 17

the variable input will exhibit

Answer 17

increasing returns to scale over a certain range of output putting downward pressure on average costs.

Question 18

Average cost curve will always

Answer 18

be ‘U’ shaped

Question 19

If marginal revenue exceeds marginal cost

Answer 19

you are selling the final product for more than the cost of making it.

Question 20

If marginal revenue is lower than marginal cost

Answer 20

it costs you more to create product so you will produce less which will lead to more profit

Question 21

In equilibrium, you maximize profit when

Answer 21

marginal revenue equals marginal costs

Question 22

In the long run average curve will be

Answer 22

U shaped. As output increases, AC will initially decline, because fixed costs can be spread over more units - ‘economies of scale’

Question 23

2 Types of economies of scale

Answer 23

1. internal

2. external

Question 24

Examples of Internal economies of scale

Answer 24

1. technical
2. Commercial
3. Financial
4. Managerial
5. Risk Bearing

Question 25

Examples of External economies of scale

Answer 25

1. Political 2. Infrastructure 3. Local reputation 4. Supply of skilled labor 5. Access to raw materials/supplies 6. Knowledge spillovers

Question 26

Economies of scope

Answer 26

occurs when the cost of producing two goods together is less than producing them separately is another source of advantage for larger firms

Question 27

Diseconomies of scale

Answer 27

Some argue that capitalism leads to an increasing concentration of capital (average cost curves slope downwards over the whole range of output)

Question 28

Make hidden costs

Answer 28

explicit

Question 29

Costs are

Answer 29

the markets way of signaling resource scarcity.

Question 30

costs result from the use of

Answer 30

factor inputs

Question 31

costs need to be

Answer 31

optimized, not minimized.