Chapter 7 Midterm 2

Question 1

4 broad categories of production inputs

Answer 1

1. INTERMEDIATE PRODUCTS, input that are outputs from some other firm, such as steel
2. inputs that are provided directly by nature, such as land owned/rented
3. inputs that are services of labour, such as employees and employers
4. inputs that are services of physical capital, such as facilities and machines used by a firm

Question 2

PRODUCTION FUNCTION

Answer 2

Q = f(K,L): Output = change(flow of capital, flow of labour services)

Question 3

Economic profit function

Answer 3

economic profits = revenue - (explicit costs + implicit costs)

Question 4

Accounting profits function

Answer 4

AP = Revenue - explicit costs

Question 5

example of Opportunity cost of time

Answer 5

Carmy paying himself 500$ a month when he could be working for 5k$ a month

Question 6

Profit max function (pi)

Answer 6

π = total rev (TR) - total costs (TC)

Question 7

Short run decision making

Answer 7

length of time over which some firm’s factors of production are fixed (not variable, cannot be changed)

Ex: consider a firm that operates a call centre in New Brunswick and gets paid a set amount for each call answered. A short-run change for this firm might be the addition of extra workers, phones, and workstations so as to process more calls per hour.

Question 8

Long run decision making

Answer 8

long run is length of time over which all the firms factors of production can be varied (except technology).

ex :In the case of the New Brunswick call centre, a long-run change might be the replacement of the firm’s existing telephone exchange with a better, digital exchange that can process a higher volume of calls. Note here that the firm has added more and better capital, with no necessary change to its variable factors which, in this case, are workers, phones, and workstations.

Question 9

Average product =

Answer 9

AP = TP/L (total product/ # of units of labour

Question 10

Marginal Product =

Answer 10

MP= ▲total product (TP) / ▲# units of labour (L)

Question 11

What is the average-marginal relationship

Answer 11

both factors will eventually usually diminish. given quantity of fixed factors and variable factors (average or marginal variables)

Question 12

Total cost =

Average total cost =

Answer 12

TC = TFC + TVC

ATC = TC/Q or AFC+AVC

Question 13

Average variable/fixed cost =

Answer 13

AFC = TFC/Q
AVC / TVC/Q

Question 14

marginal Cost =

Answer 14

▲TC/▲Q

Question 15

What are the 6 types of firms?

example for each

Answer 15

1. sole-proprietorship
   - 1 owner, dep
2. ordinary partnership
   - joint owners, dep
3. limited partnership
   - owners and investors, law firms
4. corporation
   - owners not responsible for anything done in the name of the firm
5. state-owned business
   - SAQ, Canada post
6. NPO
   - unicef, YMCA

Question 16

Equity vs Debt:

Answer 16

Equity: Financial capital that is acquired through shareholders, in return for stocks, shares; payed out in dividends

Debt: financial capital acquired through loan agreements/ bonds often with interest rates; banks, sharks, etc

Question 17

what are the terms of a loan

Answer 17

principal: original sum of money borrowed
interest: secondary payment
Redemption date: the time of expected payment

Question 18

2 goals of firms:

Answer 18

1. make profit and pay shareholders
2. be a single, consistent decision making unit

Question 19

VERY long run

Answer 19

factors of production and technology can be varied

Question 20

Give the example you created to describe the difference between fixed and varied inputs in SHORT RUN PRODUCTION

Answer 20

A RESTAURANT:
FIXED:
-stoves, dishwasher, pots , cash machines
VARIED:
- food, employees, electricity, soap, etc

Question 21

DEFINITIONS:
TP
MP
AP

Answer 21

TP: TOTAL AMOUNT PRODUCED IN A GIVEN PEROID OF TIME

AP: TOTAL PRODUCT DIVIDED by # of VARIABLE units (output/L)

MP the change in total product from the use of ONE ADDITIONAL UNIT OF VARIABLE FACTOR (▲tp/▲input)

Question 22

LAW OF DIMINISHING MARGINAL/AVERAGE RETURNS (increases what and decreases what)?

Answer 22

IF INCREASE IN VARIABLE FACTORS are applied to a QUANTITY OF FIXED FACTOR, eventually MP/AP will reach a peak and start DECREASING

Question 23

SHORT RUN COST DEF AND FORMULAs:
Total Cost

Answer 23

TC = TFC + TVC (fixed and variable)

sum of all costs a firm incurs to produce a given level of output

Question 24

SHORT RUN COST DEF AND FORMULAs:
Average Total Cost

Average Fixec Cost

Average Varied Cost

Answer 24

ATC = TC/Q(units of output)
or
ATC = AFC + AVC

total cost of producing any given number of units of output divided by # of units = ATC per unit of output

Question 25

Properties of:
-AFC
-AVC
- TVC
- TFC

Answer 25

AFC = Output ↑ ; AFC ↓ Spreading overhead

AVC = output ↑ ; AVC ↓ until minimum, then ↑ as output continues to rise

-TVC = Output ↑ or ↓, TVC changes in the same direction

• TFC = Output ↑ or↓, doesn’t affect the cost

Question 26

Is marginal cost always fixed or variable? whats the FORMULA

Answer 26

Variable

MC = ▲TC/▲Q

Question 27

wHAT IS THE RELATIONSHIP BETWEEN MP AND MC CURVES

Answer 27

they have a negative relationship, when one is at max, other is at min

Question 28

what is the term for when the level of output corresponding to the minimum short run average total cost of a firm.?

Hint: it marks the LARGEST output that can be produced without encountering rising avg costs per unit

Answer 28

CAPACITY

AND less than point of minimum average = excess capacity

Question 29

A change in the price of a variable factor shifts ______ and the _____?

Answer 29

average total cost curve and marginal cost curve

Question 30

opportunity cost of capital formula

Answer 30

investment x % rate of return

Question 31

If economic profits are negative, what occurs

Answer 31

firm exit

Question 32

explicit vs Implicit costs

Answer 32

explicit = labour, maintenance, poo

implicit = opporitunity costs, investments