Chapter 8

Question 1

ECONOMIC COSTS

Answer 1

The payment that must be made to obtain and retain the
services of a resource

Question 2

Explicit Costs

Answer 2

Monetary payments
- opportunity cost

Question 3

Implicit Costs

Answer 3

• Value of next best use
  – Self-owned resources
  – Includes normal profit
• opportuninty cost

Question 4

Accounting profit

Answer 4

= Revenue – Explicit Costs

Question 5

Economic profit

Answer 5

= Accounting Profit – Implicit Costs

Question 6

Economic profit (to summarize)

Answer 6

=Total Revenue – Economic Costs
=Total Revenue – Explicit Costs – Implicit Costs

Question 7

Short Run

Answer 7

– FixedPlant
- A period too brief to alter its capacity, yet long enough to change the degree to which the current capacity is used.

Question 8

Short Run

Answer 8

– Fixed Plant
- A period too brief to alter its capacity, yet long enough to change the degree to which the current capacity is used.

Question 9

Long Run

Answer 9

Variable Plant
A period long enough to adjust the quantities of all factors,
including plant capacity.

Question 10

Marginal Product (MP)

Answer 10

= chnage in total prooduct / chnage in labour input

Question 11

average product AP

Answer 11

average prod = total product / units of labour

Question 12

LAW OF DIMINISHING RETURNS

Answer 12

As successive units of a variable factor (say labour) are added to a fixed factor beyond some point the marginal product that can be attributed to each additional unit of the variable factor will decline.

Question 13

Fixed Costs (TFC)

Answer 13

Costs that do not vary with output

Question 14

Variable Costs (TVC)

Answer 14

Costs that vary with output

Question 15

Total Costs (TC)

Answer 15

Sum of TFC and TVC
TC = TFC + TVC

Question 16

Average Fixed Costs

Answer 16

AFC = TFC/Q

Question 17

Average Variable Costs

Answer 17

AVC = TVC/Q

Question 18

Average Total Costs

Answer 18

ATC = TC/Q

Question 19

Marginal Costs

Answer 19

MC = ΔTC/ΔQ

Question 20

Marginal Costs

Answer 20

MC = ΔTC/ΔQ

Question 21

RELATION OF MC TO AVC AND ATC
When MC < current ATC

Answer 21

ATC will fall

Question 22

RELATION OF MC TO AVC AND ATC
When MC > current ATC

Answer 22

ATC will rise

Question 23

RELATION OF MC TO AVC AND ATC
intersection

Answer 23

MC intersects ATC and AVC at minimum points

Question 24

LONG-RUN PRODUCTION COSTS

Answer 24

• In the long run firms can undertake all desired input
  adjustments.
• What will costs look like when the firm can choose the best plant size for any given situation?
• For every plant capacity size, there is a short-run ATC curve
• All such plant capacities can be plotted.

Question 25

long run graph key points
THE LONG-RUN AVERAGE-TOTAL-COST CURVE: FIVE POSSIBLE PLANT SIZES

Answer 25

• The long-run average-total-cost curve is made up of segments of the short-run cost curves
• Each point on the planning curve shows the least unit cost attainable for any output when the firm has had time to make all desired changes in its plant size.

Question 26

THELONG-RUNAVERAGE-TOTAL-COSTCURVE: UNLIMITED NUMBER OF PLANT SIZES
key points

Answer 26

• If the number of possible plant sizes is very large, the long-run average- total-cost curve approximates a smooth curve.
• Economies of scale, followed by diseconomies of scale, cause the curve to be U-shaped.

Question 27

ECONOMIES AND DISECONOMIES OF SCALE
economies of scale

Answer 27

As plant size increases, a number of factors will for a time
lead to lower average costs of production.
– Labour specialization
– Managerial specialization
– Efficient capital
– Other factors

Question 28

ECONOMIES AND DISECONOMIES OF SCALE
Constant returns to scale

Answer 28

In this range ATC is constant.

Question 29

ECONOMIES AND DISECONOMIES OF SCALE
Diseconomies of scale

Answer 29

In time the expansion of a firm may lead to higher average
total costs.
– Control and coordination problems
– Communication problems
– Worker Alienation
– Shirking

Question 30

MES AND INDUSTRY STRUCTURE

Answer 30

Economies and diseconomies of scale are an important determinant of an industry’s structure.

Question 31

MES AND INDUSTRY STRUCTURE
Minimum Efficient Scale (MES):

Answer 31

Lowest level of output where long-run average costs are
minimized
– Can determine the structure of the industry:
– Many producers or few producers and if they will be large, small, or different sizes