Costs

Question 1

Define accounting cost.

Answer 1

The direct cost of operating a business, including costs for raw materials

Question 2

Define economic cost.

Answer 2

The sum of a producers accounting and opportunity costs

Question 3

Define opportunity cost.

Answer 3

The value of what a producer gives up by using an input

Question 4

Define economic profit.

Answer 4

A firm’s total revenue minus its economic cost

Question 5

Define accounting profit.

Answer 5

A firm’s total revenue minus its accounting cost

Question 6

Define fixed cost.

Answer 6

The cost of the firm’s fixed inputs, independent of the quantity of the firm’s output

Question 7

Define variable cost.

Answer 7

The cost of inputs that vary with the quantity of the firm’s output

Question 8

Define total cost.

Answer 8

The sum of a firm’s fixed and variable costs

Question 9

What do fixed, variable and total costs look like on a graph?

Answer 9

Fixed cost is a straight line in the middle of the y axis, variable cost is a curve starting from the origin. And then total cost is a curve of the same shape but starting at the point where fixed cost intercepts the y axis.

Question 10

Draw fixed cost, variable cost and total cost on a graph.

Answer 10

Picture

Question 11

Does fixed cost or variable cost vary with output?

Answer 11

Variable

Question 12

How can you tell what is fixed cost and what is variable cost from the total cost function?

Answer 12

Fixed cost is the constant and then variable cost makes up the other variables

Question 13

What do we usually use instead of aggregated costs?

Answer 13

Average costs

Question 14

Define average fixed cost.

Answer 14

The fixed cost per unit of output

Question 15

Define average variable cost.

Answer 15

The variable cost per unit of output

Question 16

How do we find the average costs?

Answer 16

Divide the relevant costs by the quantity produced

Question 17

What does the average variable cost curve look like?

Answer 17

Straight line

Question 18

What doe the average fixed curve look like?

Answer 18

Decreasing curve

Question 19

What does the average total cost look like?

Answer 19

U shaped

Question 20

Why is the average total cost curve U shaped?

Answer 20

Initially the decrease in ATC is greater than the increase in AVC, economics of scale, so the curve slopes downwards however when the increase in AVC is greater than the decrease in ATC, diseconomies of scale, the curve slopes upwards

Question 21

What is marginal fixed cost equal to? And why?

Answer 21

0, fixed costs don’t increase as you increase the output

Question 22

How do you find the function for marginal cost?

Answer 22

Differentiate the total cost function

Question 23

How do you find the marginal cost at a particular output level?

Answer 23

Sub the value into function of marginal cost you have found

Question 24

If MC < ATC what happens to ARC as output increases?

Answer 24

ATC decreases

Question 25

If MC > ATC what happens to ARC as output increases?

Answer 25

ATC increases

Question 26

What does ATC equal at its minimum?

Answer 26

MC

Question 27

What is the relationship between MC and AVC the same as ?

Answer 27

The relationship between MC and ATC

Question 28

Why is the MC upward sloping?

Answer 28

Need to look up answer

Question 29

When looking at total cost why do we assume we are looking at the short run?

Answer 29

Because in the long run there is no such thing as a fixed cost every cost is variable

Question 30

What is the relationship between short run ATC and long run ATC? And why?

Answer 30

Long run ATC can not be greater than the short run ATC, because in the long run you can use all inputs so you will never be worse off

Question 31

Define sunk cost.

Answer 31

A cost that, one paid, the firm cannot recover

Question 32

Why do we not look at sunk costs in our model?

Answer 32

They of not matter for economic decision making

Question 33

Define economics of scale.

Answer 33

Total cost rises at a lower rate than output rises

Question 34

Define diseconomies of scale.

Answer 34

Total cost rises at a faster rate than output rises

Question 35

Define constant economics of scale.

Answer 35

Total cost rises at the same rate as output rises

Question 36

Draw average total cost, average variable cost and average fixed cost on a graph.

Answer 36

Picture