Chapter 6- Businesses and their Costs

question

stock

answer

An ownership share in a corporation.

question

bond

answer

A financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at a specific date in the future.

question

limited liability

answer

The maximum loss is the amount the owners paid for their shares of stock.

question

principal-agent problem

answer

A conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals' (stockholders') goals.

question

economic cost

answer

A payment that must be made to obtain and retain the services of a resource; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product.

question

explicit cost

answer

The monetary payment a firm must make to an outsider to obtain a resource.

question

implicit cost

answer

The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market;
forgone wages, forgone interest

question

accounting profit

answer

The total revenue of a firm less its explicit costs.

question

normal profit

answer

The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.

question

economic profit

answer

The total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called pure profit and above-normal profit.

question

short run

answer

In microeconomics, period where capital is fixed and labor is flexible

question

long run

answer

a period sufficiently long for nominal wages and other input prices to change in response to a change in the nation's price level.

question

total product (TP)

answer

The total output of a particular good or service produced by a firm (or a group of firms or the entire economy).

question

marginal product (MP)

answer

The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.

question

Average product (AP)

answer

The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource).

question

law of diminishing returns

answer

The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.

question

fixed cost

answer

Any cost that in total does not change when the firm changes its output; the cost of fixed resources.

question

variable cost

answer

A cost that in total increases when the firm increases its output and decreases when the firm reduces its output.

question

total cost

answer

The sum of fixed cost and variable cost

question

Average Fixed Cost (AFC)

answer

total fixed costs divided by quantity of output
FC/Q

question

average variable cost (AVC)

answer

A firm's total variable cost divided by output (the quantity of product produced).
VC/Q

question

average total cost (ATC)

answer

A firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost.
TC/Q

question

marginal cost (MC)

answer

The extra (additional) cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output).

question

economies of scale

answer

Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production.

question

diseconomies of scale

answer

Increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.

question

constant returns to scale

answer

No changes in the average total cost of producing a product as the firm expands the size of its operations (output) in the long run.

question

minimum efficient scale (MES)

answer

The lowest level of output at which a firm can minimize long-run average total cost.

question

corporations

answer

dominant form of business organization- legal entities separate from the individuals who own them

question

graphically the marginal cost curve intersects:

answer

the ATC and AVC curves at their minimums

question

the long run ATC curve is:

answer

generally U-shaped

question

goal of firms:

answer

maximize profit

question

Graph of production function

answer

shapes like sqrt(x)
represents law of diminishing returns

question

given diminishing returns (to labor), then as output increases:

answer

the number of workers needed to produce one more good also increases.

question

Short Run Cost Curves

answer

- min of ATC and AVC intersect MC
- ATC> AVC always, and they asymptotically get close

question

Long Run Cost Curves

answer

- ATC on y-axis, quantity on x-axis
-3 segments

question

why are there no diminishing returns to labor in the long run?

answer

because you can always give new labor new capital

question

what is different about cost curves in the long run?

answer

-input is completely flexible
- no fixed cost
- always adjust capital
TC= VC and ATC= AVC

question

Short-run and Long-run ATC curves look similar but:

answer

their motivations are different

question

sunk cost

answer

a cost that has already been paid and cannot be recovered

question

good decision making:

answer

ignores sunk costs and considers MB and MC

question

The principal-agent problem in corporations arises from:

answer

a conflict of interest between corporate executives who manage the firm and stockholders who own the firm.

question

Which of the following best expresses the law of diminishing returns?

answer

As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital), beyond some point the resulting extra output will decline.

question

If average total cost is declining, then:

answer

marginal cost must be less than average total cost.

question

Economies and diseconomies of scale explain:

answer

why the firm's long-run average total cost curve is U-shaped.

question

is ATC always larger than AVC?

answer

yes

question

segment 1 of Long run cost curve

answer

-economies of scale
- specialization of management, labor, capital
- buys inputs in bulk
- hard to make few products

question

when do economies of scale end?

answer

when you reach minimum efficient scale

question

segment 2 of Long run cost curve

answer

-constant returns to scale
-double inputs ---> double outputs

question

segment 3 of Long run cost curve

answer

- diseconomies of scale
- coordination problems
- target for litigation

question

in the long run are there fixed costs?

answer

question

What causes the long run ATC curve to initially decrease?

answer

-indivisible inputs
- specialization
- the ability to purchase inputs in bulk

question

shape of long run cost curves shows:

position of the curves to one another shows:

answer

increasing returns, then diminishing returns

economies and diseconomies of scale

1 of 52

question

stock

answer

An ownership share in a corporation.

question

bond

answer

A financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at a specific date in the future.

question

limited liability

answer

The maximum loss is the amount the owners paid for their shares of stock.

question

principal-agent problem

answer

A conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals' (stockholders') goals.

question

economic cost

answer

question

explicit cost

answer

The monetary payment a firm must make to an outsider to obtain a resource.

question

implicit cost

answer

The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market;
forgone wages, forgone interest

question

accounting profit

answer

The total revenue of a firm less its explicit costs.

question

normal profit

answer

The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.

question

economic profit

answer

The total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called pure profit and above-normal profit.

question

short run

answer

In microeconomics, period where capital is fixed and labor is flexible

question

long run

answer

a period sufficiently long for nominal wages and other input prices to change in response to a change in the nation's price level.

question

total product (TP)

answer

The total output of a particular good or service produced by a firm (or a group of firms or the entire economy).

question

marginal product (MP)

answer

question

Average product (AP)

answer

The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource).

question

law of diminishing returns

answer

The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.

question

fixed cost

answer

Any cost that in total does not change when the firm changes its output; the cost of fixed resources.

question

variable cost

answer

A cost that in total increases when the firm increases its output and decreases when the firm reduces its output.

question

total cost

answer

The sum of fixed cost and variable cost

question

Average Fixed Cost (AFC)

answer

total fixed costs divided by quantity of output
FC/Q

question

average variable cost (AVC)

answer

A firm's total variable cost divided by output (the quantity of product produced).
VC/Q

question

average total cost (ATC)

answer

A firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost.
TC/Q

question

marginal cost (MC)

answer

question

economies of scale

answer

Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production.

question

diseconomies of scale

answer

Increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.

question

constant returns to scale

answer

No changes in the average total cost of producing a product as the firm expands the size of its operations (output) in the long run.

question

minimum efficient scale (MES)

answer

The lowest level of output at which a firm can minimize long-run average total cost.

question

corporations

answer

dominant form of business organization- legal entities separate from the individuals who own them

question

graphically the marginal cost curve intersects:

answer

the ATC and AVC curves at their minimums

question

the long run ATC curve is:

answer

generally U-shaped

question

goal of firms:

answer

maximize profit

question

Graph of production function

answer

shapes like sqrt(x)
represents law of diminishing returns

question

given diminishing returns (to labor), then as output increases:

answer

the number of workers needed to produce one more good also increases.

question

Short Run Cost Curves

answer

- min of ATC and AVC intersect MC
- ATC> AVC always, and they asymptotically get close

question

Long Run Cost Curves

answer

- ATC on y-axis, quantity on x-axis
-3 segments

question

why are there no diminishing returns to labor in the long run?

answer

because you can always give new labor new capital

question

what is different about cost curves in the long run?

answer

-input is completely flexible
- no fixed cost
- always adjust capital
TC= VC and ATC= AVC

question

Short-run and Long-run ATC curves look similar but:

answer

their motivations are different

question

sunk cost

answer

a cost that has already been paid and cannot be recovered

question

good decision making:

answer

ignores sunk costs and considers MB and MC

question

The principal-agent problem in corporations arises from:

answer

a conflict of interest between corporate executives who manage the firm and stockholders who own the firm.

question

Which of the following best expresses the law of diminishing returns?

answer

As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital), beyond some point the resulting extra output will decline.

question

If average total cost is declining, then:

answer

marginal cost must be less than average total cost.

question

Economies and diseconomies of scale explain:

answer

why the firm's long-run average total cost curve is U-shaped.

question

is ATC always larger than AVC?

answer

yes

question

segment 1 of Long run cost curve

answer

-economies of scale
- specialization of management, labor, capital
- buys inputs in bulk
- hard to make few products

question

when do economies of scale end?

answer

when you reach minimum efficient scale

question

segment 2 of Long run cost curve

answer

-constant returns to scale
-double inputs ---> double outputs

question

segment 3 of Long run cost curve

answer

- diseconomies of scale
- coordination problems
- target for litigation

question

in the long run are there fixed costs?

answer

question

What causes the long run ATC curve to initially decrease?

answer

-indivisible inputs
- specialization
- the ability to purchase inputs in bulk

question

shape of long run cost curves shows:

position of the curves to one another shows:

answer

increasing returns, then diminishing returns

economies and diseconomies of scale

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