question
Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant.
What is your aunt's opportunity cost of running a hardware store for a year? If your aunt thought she could sell $510,000 worth of merchandise in a year, should she open the store? Explain.
What is your aunt's opportunity cost of running a hardware store for a year? If your aunt thought she could sell $510,000 worth of merchandise in a year, should she open the store? Explain.
answer
The opportunity cost of running the hardware store is $550,000, consisting of $500,000 to rent the store and buy the stock and a $50,000 implicit cost, because your aunt would quit her job as an accountant to run the store. Because the total opportunity cost of $550,000 exceeds the projected revenue of $510,000, your aunt should not open the store, as her economic profit would be negative.
question
we assume the firm's goal is to maximize profit. Profit equals the firm's total revenue minus their total costs. We can also rewrite out profit equation as (P-ATC)*Q which is the price of the good (the revenue per unit) minus the average total cost (the cost per unit)... times the number of units bought and sold. Aka the "profit per unit" times the number of units sold.
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Profit
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The total revenue of the firm (the initial amount they make off the sale of their output) equals the price of the good times the quantity of the good bought and sold.
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Total Revenue (TR)
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he firm's total revenue minus their explicit costs.
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Accounting profit =
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the firm's total revenue minus ALL of their costs (explicit AND implicit). Because economic profit takes into account ALL of the firm's opportunity costs of production, it is always lower than accounting profit. In chapter 14, we will refer to "positive" economic profit, "negative" economic profit, and "zero" economic profit - keep in mind that when we say this, it means we are including all of the firm's opportunity costs.
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Economic profit =
question
We can look at firm's production function using a graph, table, or equation. When we do so, we are looking at varying one (or more) of the firm's inputs and seeing how output varies in response.
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Production Function
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ow does output change when we change one of the inputs by one unit?
Ex. Marginal Product of Labor (MPl): how does output change when we increase labor 푀푃퐿by one unit? (i.e. how does output change when we hire one more worker?)
Ex. Marginal Product of Labor (MPl): how does output change when we increase labor 푀푃퐿by one unit? (i.e. how does output change when we hire one more worker?)
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Marginal Product (MP):
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a firm displays this characteristic when an additional worker is actually less productive (contributes less to the total output) than the worker added before him (i.e. when the marginal product of labor decreases with an additional worker). In many firms, we see marginal product of labor increase for the first few workers (i.e. they become more productive as more workers are added, possibly due to "dividing and conquering") but usually we see firms exhibit diminishing marginal product of labor at some point.
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Diminishing Marginal Product of Labor:
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How do costs increase when we produce one more unit? For example, if marginal cost = $5, that means "producing one more unit will cost an additional $5". It equals the change in total costs divided by the change in the quantity of output. The MC curve looks different, depending on the characteristics of the firm. But it is not unusual for the MC curve to look like a "Nike swoosh".
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Marginal Cost (MC)
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costs that do not change, and you have to pay, regardless of how much output you produce. A firm must still pay the fixed costs of production, even if they produce zero output that day. Examples usually include rent, the cost of land, etc.
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Fixed Cost (FC):
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Costs that change (vary) depending on how much output you produce. Examples usually include labor costs (what you have to pay your workers, when the amount of workers you have varies), the cost of ingredients. Etc.
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Variable Cost (VC)
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The total cost of production is the sum of all of the firm's fixed costs and all of their variable costs, put together.
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Total Cost (TC)
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The fixed cost per unit. It decreases as output increases.
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Average Fixed Cost (AFC)
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the variable cost per unit. The curve is typically U-shaped.
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Average Variable Cost (AVC)
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The cost per unit. It incorporates both those fixed and variable costs. The curve is typically U-shaped.
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Average Total Cost (ATC)
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The quantity that makes the cost per unit (i.e. the ATC) as low as possible. This is the quantity associated with the minimum point of that U-shaped ATC curve.
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Efficient Scale
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Some costs are fixed in the short run (i.e. the size of the factory), while all costs are variable in the long run (i.e. given a few years, we can alter any type of input - including factory size). So in the L-R, we will (for example) pick the factory size that will make our cost per unit (our ATC) as low as possible.
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Costs in the SR vs. Costs in the LR
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A firm exhibits economies of scale if increasing output makes the cost per unit decrease (i.e. makes ATC decrease)
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Economies of Scale
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A firm exhibits constant returns to scale if increasing output keeps the cost per unit the same (i.e. ATC stays constant as Q increases)
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Constant Returns to Scale
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A firm exhibits diseconomies of scale if increasing output makes the cost per unit rise (i.e. makes ATC increase).
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Diseconomies of Scale
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The marginal product of labor is equal to the
a.incremental cost associated with a one unit increase in labor.
b.incremental profit associated with a one unit increase in labor.
c.increase in labor necessary to generate a one unit increase in output.
d.increase in output obtained from a one unit increase in labor.
a.incremental cost associated with a one unit increase in labor.
b.incremental profit associated with a one unit increase in labor.
c.increase in labor necessary to generate a one unit increase in output.
d.increase in output obtained from a one unit increase in labor.
answer
D
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