Costs of production

Question 1

Describe the profit maximisation rule

Answer 1

when MR = MC

firms should produce as long as the additional revenue of the output is greater than the additonal cost of producing that output

Question 2

describe the law of diminishing marginal returns

Answer 2

as you add more inputs, the marginal product will eventually begin to fall (additional output for each additional input)

increasing marginal returns in stage 1

• Total product is increasing at an increasing rate due to specialisation

decreasing marginal returns in stage 2

• total product increasing at a decreasing rate due to fixed resources

negative marginal returns in stage 3

• total products falling

Question 3

how do you calculate marginal cost?

Answer 3

change in total cost/ change in output

Question 4

Answer 4

marginal cost = change in total cost / change in output

change in output= 1

Question 5

what is the average variable cost (AVB), average fixed cost (AFC) and average total cost (ATC)?

Answer 5

Question 6

Answer 6

Question 7

why does marginal cost decrease then increase?

Answer 7

due to the law of diminishing marginal returns

as you produce more units, the additional cost of one unit begins to fall due to specialisation. However, due to fixed resources, the additional cost of producing one unit will increase

Question 8

ATC and AVC both intersect with marginal cost at

Answer 8

their minimum

Question 9

why is average fixed cost decreasing on the cost curve?

Answer 9

Because average fixed cost is calculated by dividing fixed costs (which are by definition fixed) by the quantity produced, average fixed cost must decline as the quantity produced rises.

Question 10

what is the cost of producing 5 units?

Answer 10

Question 11

what is the total cost of producing 5 units?

Answer 11

$70

Question 12

what is the variable cost of producing 5 units?

Answer 12

Question 13

find the average fixed cost on the cost curve

Answer 13

Question 14

Why does the ATC go down to a minimum and then increases?

Answer 14

when the marginal cost (additional cost) is below the ATC, it will cause the ATC decrease

When the marginal cost (additional cost) is above the ATC, it will cause the ATC to increase

that is why the marginal cost intersects with ATC at ATC’s minimum

Question 15

why does the AVC appear like this on the cost curve?

Answer 15

AVC decreases with marginal cost is decreasing

AVC increases when marginal cost is increasing

Question 16

calculate the total cost and marginal cost

Answer 16

Question 17

how much is total revenue?

How much is total cost?

total profit?

Answer 17

TR = 10 x 5 = 50

TC = 10 x 12 = 120

TP = -70, making a 70 loss

Question 18

Find the fixed cost at 10 units

Answer 18

FC = 10 x 5 = 50

Question 19

describe how marginal product of labour changes

Answer 19

marginal product of labor exists at low levels of production

at higher levels of production, decreasing marginal product of labor exists.

Question 20

when there is Increasing marginal product of labor,

when there is decreasing marginal product of labour,

Answer 20

Increasing marginal product of labor → it takes fewer workers to produce an additional unit of output –> Decreasing marginal cost

Decreasing marginal product of labor → it takes more workers to produce an additional unit of output —> Increasing marginal cost

Question 21

Describe MC’s relationship with AVC

Answer 21

If marginal cost is greater than average variable cost, then average variable cost is increasing; if marginal cost is less than average variable cost, then average variable cost is decreasing.

MC meets AVC at its minimum

Question 22

why is there a small dip in marginal cost at the beginning?

Answer 22

This allows for the possibility of decreasing marginal cost at very low levels of production.

(the marginal product of labor increases and, therefore, marginal cost declines)

Question 23

as you increase the amount of production (increase qty)

Answer 23

the distance between average total cost and average variable cost gets smaller because the average fixed cost becomes very small as output increases

Question 24

to maximise profits, firms should produce at

Answer 24

Price = MC

Question 25

when are we at breakeven point?

Answer 25

when P = ATC

Question 26

When P\>AVC, a firm should

Answer 26

continue to operate in the short run because it is earning enough to cover its variable costs and some, but not all, **of its fixed costs.** shutting down would eliminate this extra revenue. thereby by operating, firm is **minimizing its losses in the short run**

Question 27

why should a firm shutdown when P

Answer 27

shutting down would *_eliminate the extra costs._* By shutting down, the firm _will have to pay its fixed costs in the short run_ but will not have the burden of any **additional losses. (losing even more than its fixed costs)**

Question 28

a firm that is making a loss may choose to

Answer 28

- continue to operate - shut down

Question 29

in the long run, what can a firm do? what happens to fixed and variable costs?

Answer 29

In the long run, the firm can expand **by increasing its capital.** Fixed costs increase and variable costs decline at each level of production as the firm **expands its capital.**

Question 30

when capital is employed in the long run, what happens to costs?

Answer 30

total costs, and average total cost, are **higher** at low levels of production and **lower** at high levels of production

Question 31

What happens to ATC in the long run?

Answer 31

**at lower levels of output, higher fixed costs raise average total cost**; at higher levels of output, lower variable costs tend to l**ower average total cost.**

Question 32

In the long run, what may the firm do to maximise profits?

Answer 32

the firm adjusts the **amount of capital to maximize profits.** It will also choose the mix of labor and capital that maximizes profits, so that when the price of labor rises relative to capital, the firm will switch away from labor toward capital, and vice versa. (price of capital rises relative to labour)

Question 33

when a firm increases capital, what happens to fixedand variable cost?

Answer 33

fixed cost will increase variable cost will decrease Total cost will decrease

Question 34

what is economies of scale?

Answer 34

a situation in which long-run average total cost declines as the output of a firm increases. (as firm expands)

Question 35

diseconomies of scale

Answer 35

situation in which long-run ATC increases as the output of a firm increases. Sets in when firm becomes to large

Question 36

what is constant returns to scale:

Answer 36

a situation in which long-run average total cost is constant as the output of a firm changes.

Question 37

Typical Shape of the Long-Run Average Total Cost Curve

Answer 37

declines at low levels of output, then remains flat, and finally begins to increase at high levels of output.

Question 38

what is the minimum efficient scale?

Answer 38

smallest scale of production for which long-run average total cost is at a minimum

Question 39

why may ATC face diseconomies of scale?

Answer 39

As a firm gets very large, administrative expenses, as well as coordination and incentive problems, will begin to raise ATC

Question 40

why may firms experience economies of scale?

Answer 40

Firms grow and ATC falls as a result of - increase in capital - mergers - bulk purchase - specialization that the **division of labor in larger firms**

Question 41

describe inputs in the short and long run

Answer 41

Question 42

SR cost measures

Answer 42

Question 43

find marginal cost, AFC, ATC, AVC

Answer 43

Question 44

Relationship between MC and AVC (ATC)

Answer 44

If MC If MC \> AVC (ATC), AVC rises

Question 45

relationship between MP_L and MC

Answer 45

Diminishing MP_L leads to increasing MC But at low or very low Q, increasing MP_L leads to decreasing MC

Question 46

another way to express MC

Answer 46

Question 47

What is AR?

Answer 47

Question 48

for price-taking firm,

Answer 48

Question 49

in short run,

Answer 49

firms maximise profits, by producing at Q\* where MC = MR

Question 50

describe relationship between costs and profit

Answer 50

Question 51

when is there break even point?

Answer 51

when price equals the minimum ATC P(=AR) = ATC (At Q\*)

Question 52

When is there negative profits?

Answer 52

P (=AR)

Question 53

FC costs are a what in short run?

Answer 53

Sunk cost

Question 54

why do firms continue operating even if they are making losses?

Answer 54

fixed costs are a sunk cost

Question 55

what about long run MC?

Answer 55

Question 56

relationship between MC_LR and ATC_LR

Answer 56

MC_LR LR then ATC_LR falls MC_LR \> ATC_LR then ATC_LR rises

Question 57

in LR

Answer 57

Question 58

describe constant returns to scale

Answer 58

Question 59

describe increasing returns to scale

Answer 59

Question 60

describe decreasing returns to scale

Answer 60

Question 61

show typical firm

Answer 61

Question 62

what is diseconomies of scale

Answer 62

Question 63

what is economies of scale?

Answer 63

Question 64

whati s economies of scope

Answer 64

Question 65

Perfect competition formula for profit what is profit-maxising qty? ATC=

Answer 65

profit = (P-ATC) x Q P(MB) = MC ATC = AFC + AVC

Question 66

when P\>AVC_min and producer surplus?

Answer 66

when P \> AVC_min, we can always find positive producer surplus when PS\>0 (positive PS), firms covering some part of fixed costs

Question 67

when Pmin and producer surplus?

Answer 67

when P \> AVC_min, negative PS i.e. PS= (P-AVC) x Q firm cannot cover ixed costs. Firm incurs loss. It's goal is to minimise loss. by shutting down, they can minimise loss Loss\> fixed costs PS Porifit + fixed cost

Question 68

Profit=

Answer 68

TR - TC (PxQ) - (ATCxQ) = (P-ATC)xQ

Question 69

producer surplus =

Answer 69

profit + fixed cost (P-ATC) x Q + AFC x Q **_= (P-AVC)xQ_**

Question 70

fixed cost =

Answer 70

PS-profit