question
If the average total costs is falling,
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the marginal cost curve must be below the average total cost curve.
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explicit costs
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The actual payments a firm makes to its factors of production and other suppliers. (employee wages, electricity bill, advertising)
question
implicit costs
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Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur (such as time, capital invested, etc.)
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Economic profit
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total revenue minus total cost (Total Opportunity cost), including both explicit and implicit costs
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Accounting cost
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total revenue minus explicit cost
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production function
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the relationship between quantity of inputs used to make a good and the quantity of output of that good by the firm
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short run
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the period of time during which at least one of a firm's inputs is fixed
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long run
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the time period in which all inputs can be varied
question
As a waiter you earn $60,000 per year, including tips. Someone offers you a new job as an economic consultant, which pays $100,000 per year. In order to be a consultant, you'll need to rent an office and purchase supplies and new computer equipment. We can conclude which of the following?
answer
If the explicit cost for the consulting job is $25,000 per year, your economic profit is equal to $15,000.
FEEDBACK: Economic profits are calculated by subtracting implicit cost from accounting profit. With explicit costs of $25,000, the accounting profit is equal to $75,000. Because you're giving up your next best job, being a waiter, the implicit cost of being a consultant is $60,000. Therefore, your economic profit is equal to $15,000.
FEEDBACK: Economic profits are calculated by subtracting implicit cost from accounting profit. With explicit costs of $25,000, the accounting profit is equal to $75,000. Because you're giving up your next best job, being a waiter, the implicit cost of being a consultant is $60,000. Therefore, your economic profit is equal to $15,000.
question
economies of scale
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factors that cause a producer's average cost per unit to fall as output rises
question
The cookie company in the mall hires workers to produce cookies. The workers are paid $75 per day, and the cost of renting the space in the mall is $250 per day.
What are the fixed costs?
What are the fixed costs?
answer
$250
FEEDBACK: Regardless of the number of cookies made or workers hired, the bakery still pays $250 per day for its space in the mall. The fixed cost is therefore $250.
FEEDBACK: Regardless of the number of cookies made or workers hired, the bakery still pays $250 per day for its space in the mall. The fixed cost is therefore $250.
question
The marginal cost curve
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intersects the ATC at its minimum point.
FEEDBACK: The AFC curve will fall with increased output. The marginal cost curve does not always decline; it depends whether the returns are diminishing or increasing. The marginal cost numbers will dictate the shape of the curve. When marginal cost is equal to average cost, it is shown as where both curves meet. This happens at the lowest point on the ATC curve.
FEEDBACK: The AFC curve will fall with increased output. The marginal cost curve does not always decline; it depends whether the returns are diminishing or increasing. The marginal cost numbers will dictate the shape of the curve. When marginal cost is equal to average cost, it is shown as where both curves meet. This happens at the lowest point on the ATC curve.
question
Which of the following statements is true?
answer
The AFC curve can never rise.
FEEDBACK: By definition, accounting profit cannot be smaller than economic profit, since economic profit takes implicit costs into account. The short run is not defined by a specific period of time, but rather by how long a firm's contracts are. Firms are producing in either the short or long run, there is no middle run. The AFC, by definition, cannot rise as output increases.
FEEDBACK: By definition, accounting profit cannot be smaller than economic profit, since economic profit takes implicit costs into account. The short run is not defined by a specific period of time, but rather by how long a firm's contracts are. Firms are producing in either the short or long run, there is no middle run. The AFC, by definition, cannot rise as output increases.
question
Dasenbrock and Gauss farms are able to achieve huge cost savings as they increase their acreage. This would be referred to in economics as
answer
achieving economies of scale
FEEDBACK: Since the company is saving money as they accrue more acres, this means that the company is experiencing economies of scale.
FEEDBACK: Since the company is saving money as they accrue more acres, this means that the company is experiencing economies of scale.
question
Diminishing marginal product refers to marginal product that often initially _____ but eventually ______.
answer
increases; decreases
FEEDBACK: Diminishing marginal product occurs when the marginal product falls as the quantity of the input increases. Initially, as more units of the input are employed, marginal product often increases due to specialization and teamwork. However, because some inputs are fixed, marginal product eventually falls even as other inputs continue to be added.
FEEDBACK: Diminishing marginal product occurs when the marginal product falls as the quantity of the input increases. Initially, as more units of the input are employed, marginal product often increases due to specialization and teamwork. However, because some inputs are fixed, marginal product eventually falls even as other inputs continue to be added.
question
Explicit costs are called _____ costs and implicit costs are _____ costs.
answer
out-of-pocket; opportunity
FEEDBACK: Explicit costs represent every expense incurred to run the business. Implicit costs are also opportunity costs because the use of owned resources means that the next-best alternative use is forgone.
FEEDBACK: Explicit costs represent every expense incurred to run the business. Implicit costs are also opportunity costs because the use of owned resources means that the next-best alternative use is forgone.
question
In the long run, costs are
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variable only
FEEDBACK: In the long run, all costs are variable because factors of production can be changed, contracts can be renegotiated, and firms can enter or exit the market.
FEEDBACK: In the long run, all costs are variable because factors of production can be changed, contracts can be renegotiated, and firms can enter or exit the market.
question
Profits and losses are determined by
answer
subtracting total costs from total revenue.
FEEDBACK: The total amount a producer takes in from selling a product is known as total revenue. The total amount a producer has to spend to make and sell the product is known as total costs, and includes production, advertising, and retail costs, among others. Profits and losses are determined by subtracting total cost from total revenue.
FEEDBACK: The total amount a producer takes in from selling a product is known as total revenue. The total amount a producer has to spend to make and sell the product is known as total costs, and includes production, advertising, and retail costs, among others. Profits and losses are determined by subtracting total cost from total revenue.
question
Diseconomies of scale
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the situation in which a firm's long-run average costs rise as the firm increases output
question
The cost of a firm's inputs increased by 40%. As a result, output increased by 25%. This firm experienced
answer
diseconomies of scale.
FEEDBACK: Diseconomies of scale occurs when the cost of inputs increase by a greater percentage than output. In this question the costs of inputs increased by 40% but output by only 25%. Therefore, the firm experienced diseconomies of scale.
FEEDBACK: Diseconomies of scale occurs when the cost of inputs increase by a greater percentage than output. In this question the costs of inputs increased by 40% but output by only 25%. Therefore, the firm experienced diseconomies of scale.
question
The increasing returns to hiring the first workers exist because of...
answer
specialization.
FEEDBACK: All variable costs initially decline due to increased specialization. At a certain point, the advantages of continued specialization give way to diminishing marginal product and the marginal cost curves and begins to rise.
FEEDBACK: All variable costs initially decline due to increased specialization. At a certain point, the advantages of continued specialization give way to diminishing marginal product and the marginal cost curves and begins to rise.
question
Which of the following is a factor of production?
answer
capital
FEEDBACK: Factors of production are the inputs used in producing goods and services, including land, labor, and capital. Output is the production the firm creates; therefore, it is not a factor of production.
FEEDBACK: Factors of production are the inputs used in producing goods and services, including land, labor, and capital. Output is the production the firm creates; therefore, it is not a factor of production.
question
Which of the following is an explicit cost for a business owner?
answer
a worker's salary
FEEDBACK: Implicit costs are the opportunity costs of doing business. Since a worker's salary is a tangible out-of-pocket expense, it is an explicit cost, not an implicit cost.
FEEDBACK: Implicit costs are the opportunity costs of doing business. Since a worker's salary is a tangible out-of-pocket expense, it is an explicit cost, not an implicit cost.
question
The large firm has 14.9% reduced productivity, and the small firm has 10% reduced productivity. If everything else is constant, what can we say about the cost structures in this industry?
answer
The firms in this industry have diseconomies of scale.
FEEDBACK: The correct answer is that these firms have diseconomies of scale. As the number of managerial positions per worker increases, productivity falls. Assuming that everything else is constant, the bigger firms are less efficient—they have diseconomies of scale.
FEEDBACK: The correct answer is that these firms have diseconomies of scale. As the number of managerial positions per worker increases, productivity falls. Assuming that everything else is constant, the bigger firms are less efficient—they have diseconomies of scale.
question
Firms producing an identical product in a perfectly competitive market are producing at a quantity that maximizes profit. The current market price is $4.50 per unit, and the firms are producing at a long-run average cost of $3.50 per unit. Firms in this market experience
answer
a profit
FEEDBACK: If the price sellers receive in the market is greater than the long-run average total cost of producing the good, then firms earn a profit. Since price is $4.50 and that is greater than the long-run average total cost of $3.50 per unit, the firms in this market experience a profit.
FEEDBACK: If the price sellers receive in the market is greater than the long-run average total cost of producing the good, then firms earn a profit. Since price is $4.50 and that is greater than the long-run average total cost of $3.50 per unit, the firms in this market experience a profit.
question
For a perfectly competitive firm, marginal revenue is
answer
equal to price
FEEDBACK: The marginal revenue is the change in total revenue when the firm sells additional units. For competitive firms, the marginal revenue they receive from selling an additional unit is equal to the price, since demand is perfectly elastic at the market price.
FEEDBACK: The marginal revenue is the change in total revenue when the firm sells additional units. For competitive firms, the marginal revenue they receive from selling an additional unit is equal to the price, since demand is perfectly elastic at the market price.
question
If competitive firms experience a loss, over the long run there will be a(n)
answer
decrease in market supply to increase the market price
FEEDBACK: Firms in a perfectly competitive market can exit the industry easily in the long run. Some firms will do so in the long run order to avoid further losses. As supply decreases from the exit of some firms, the market price increases.
FEEDBACK: Firms in a perfectly competitive market can exit the industry easily in the long run. Some firms will do so in the long run order to avoid further losses. As supply decreases from the exit of some firms, the market price increases.
question
In a perfectly competitive market, the long-run market supply curve is
answer
horizontal at the market price
FEEDBACK: Free entry into the market and easy exit force the long-run price to the minimum point on the average total cost curve. At all prices above the long-run price, firms will earn a profit (causing new firms to enter and driving the price lower) and at all prices below the long-run price firms will experience a loss (causing firms to leave and driving the price higher). This means the long-run supply curve must be horizontal at the long-run price. If the price was any higher or lower firms would enter or exit the market, and the market would not be in long-run equilibrium.
FEEDBACK: Free entry into the market and easy exit force the long-run price to the minimum point on the average total cost curve. At all prices above the long-run price, firms will earn a profit (causing new firms to enter and driving the price lower) and at all prices below the long-run price firms will experience a loss (causing firms to leave and driving the price higher). This means the long-run supply curve must be horizontal at the long-run price. If the price was any higher or lower firms would enter or exit the market, and the market would not be in long-run equilibrium.
question
In a perfectly competitive market, the price of the product is
answer
set by market supply and demand
FEEDBACK: Firms that produce goods in competitive markets are known as price takers. A price taker has no control over the price set by the market. It takes, that is, accepts, the price determined from the overall supply and demand conditions that regulate the market.
FEEDBACK: Firms that produce goods in competitive markets are known as price takers. A price taker has no control over the price set by the market. It takes, that is, accepts, the price determined from the overall supply and demand conditions that regulate the market.
question
Profits when a competitive firm shuts down are -$7,250 and profits are -$250 when the firm continues to produce. This firm will minimize losses by
answer
continuing to produce
question
The price of a competitive firm's product is $50 per unit. The firm currently has marginal cost equal to $40. To maximize profits this firm
answer
should increase its output
question
To maximize profits, firms expand output until
answer
MR = MC
question
Which of the following types of firm most closely fits the description of a competitive firm?
answer
corn farmers
question
A firm is experiencing a loss of $5,000 per year when operating. The firm has fixed costs of $8,000 per year. The firm should _________ in the short run and should _________ in the long run.
answer
operate; shut down
question
A producer would decide to produce in a competitive market in which she will earn zero profit in the long run because
answer
at zero profit, her revenue will cover all her costs, both explicit and implicit (opportunity cost).
question
A natural monopoly exists when a single seller experiences ____________ average total costs than any potential competitor.
answer
lower
FEEDBACK: In an industry that has large economies of scale, production costs per unit continue to fall as the firm expands. Smaller rivals will have much higher average costs that prevent them from competing with a larger company. As a result, firms in the industry naturally tend to combine over time. This leads to the creation of a natural monopoly, which occurs when a single large firm has lower costs than any potential competitor.
FEEDBACK: In an industry that has large economies of scale, production costs per unit continue to fall as the firm expands. Smaller rivals will have much higher average costs that prevent them from competing with a larger company. As a result, firms in the industry naturally tend to combine over time. This leads to the creation of a natural monopoly, which occurs when a single large firm has lower costs than any potential competitor.
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