Chapter 8

Question 1

How is accounting profit calculated?

Answer 1

Profit (Loss) = Total Revenue - Explicit costs

Question 2

What is Total Revenue?

Answer 2

The amount a firm receives from the sale of goods and services

Question 3

What are explicit costs?

Answer 3

The amount a firm spends to produce and/or sell goods and services

Question 4

How is Economic Profit calculated?

Answer 4

Economic Profit = total revenues - (explicit costs + implicit costs)

= accounting profit - implicit costs

Question 5

What are explicit costs?

Answer 5

Tangible out of pocket expenses

Question 6

What are implicit costs? Give an example.

Answer 6

The costs of resources already owned, for which no out-of-pocket payments are made.

eg. opportunity costs

Question 7

How does accounting profit compare to economic profit?

Answer 7

Economic profit is always less than accounting profit

Question 8

What is the production function?

Answer 8

The relationship between the inputs a firm uses and the output it creates

Question 9

What are inputs?

Answer 9

A resource used in the production process to generate output

Question 10

What are the three primary factors of production?

Answer 10

Labor, land and capital (LLC)

Question 11

What are outputs (in relation to the production function)?

Answer 11

The product the firm creates

Question 12

What is marginal product?

Answer 12

The change in output associated with one additional unit of input

Question 13

When does the point of diminishing marginal product occur?

Answer 13

When successive increases in inputs are associated with a slower rise in output.

• Firms should continue production as long as the revenue from output is more than the costs of input

Question 14

Why does diminishing marginal product occur?

Answer 14

The firm is fixed in the short run and inputs are fully utilised

The gains from specialisation slowly decline

Question 15

Describe the graph of marginal product

Answer 15

Question 16

How do we calculate average total costs (ATC)?

Answer 16

= AVC + AFC = Total cost / Quantity (Q)

Question 17

Why does the ATC rise?

Answer 17

Eventually, the increases in variable costs overwhelm the cost savings achieved by spreading fixed cost across more production

Question 18

What are variable costs?

Answer 18

Costs that change with the rate of output

Question 19

How do we calculate average variable costs?

Answer 19

TVC / Quantity (Q)

Question 20

What are fixed costs (a.k.a overhead)?

Answer 20

Unavoidable costs that do not vary with output in the short run

Question 21

How do we calculate average fixed costs?

Answer 21

TFC / Quantity (Q)

Question 22

What happens to average fixed costs when output increases?

Answer 22

AFC declines

Question 23

What is marginal cost?

Answer 23

The increase in cost that occurs from producing one additional unit of output

Question 24

How is marginal costs calculated?

Answer 24

Change in total cost / Change in Quantity

Question 25

Why does the ATC fall as the MC and AVC are rising?

Answer 25

The _decline in AFC overwhelms the increase in AVC_

Question 26

Why does MC rise above ATC?

Answer 26

Diminishing marginal product

Question 27

What is the "average" curve that marginal cost does not affect?

Answer 27

AFC

Question 28

Describe the cost curves graph

Answer 28

Question 29

What is not relevant for costs in the long run?

Answer 29

Diminishing marginal product (scale is relevant instead)

Question 30

How are costs classified in the long run?

Answer 30

All costs are variable

Question 31

How can firms adjust in the long run?

Answer 31

By changing the scale

Question 32

What is scale and the three types?

Answer 32

The size of the production process - Economies of scale - Diseconomies of scale - Constant returns to scale

Question 33

When does an economies of scale occur?

Answer 33

When _long-run average total costs decline as output expands_

Question 34

When does a diseconomies of scale occur?

Answer 34

When _long-run average total costs rise as output expands_

Question 35

When do constant returns to scale occur?

Answer 35

When _long-run total costs remain constant as output expands_

Question 36

Describe the Long Run Average Total Cost curves

Answer 36

Question 37

What is the efficient scale?

Answer 37

The _output level that minimises the ATC_ _in the long run_

Question 38

Where is the efficient scale?

Answer 38

The production quantity at which marginal cost equals average total cost.