Chapter 8: Costs and the Supply of Goods

question

Long-run diseconomies of scale exist over the range of output for which the long-run average total cost curve

answer

rises

question

Economists refer to historical costs (irreversible costs already incurred) as

answer

sunk costs.

question

Suppose a professor gives up her teaching job to devote her time to writing textbooks. If salaries of professors rise,

answer

her economic profit from textbooks will fall.

question

For a firm that wants to remain in business, which of the following costs could be avoided if it halted current production

answer

variable costs.

question

If average fixed costs equal $60 and average total costs equal $120 when output is 100, the total variable cost must be

answer

$6,000.

question

Which of the following is an implication of the law of diminishing returns

answer

in the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.

question

If a firm increases its output and finds that its average total cost decreases as a result, this implies that

answer

average total cost exceeds marginal cost.

question

In the short run, the firm's average fixed cost

answer

always decline as output increases.

question

Which of the following provides the best explanation for diseconomies of scale

answer

large management structures may be bureaucratic and inefficient.

question

Which of the following would cause a firm's cost curves to shift upward

answer

an increase in government regulations.

question

Residual claimants

answer

persons who share in the profits of a business firm.

question

Contracting

answer

owner contracts with individual workers who work independently.

question

Team production

answer

workers are hired by a firm to work together under supervision.

question

Shirking

answer

The behavior of a worker who is putting forth less than the agreed-to effort.

question

Principal-agent problem

answer

the incentive problem that arises when the lack of information makes it difficult for the purchaser (principal) to determine whether the seller (agent) is acting in the principal's best interest.

question

Proprietorship

answer

a business owned and run by just one person.

question

Proprietorship

answer

make up 72% of firms, but only 4% of total business revenue

question

Partnership

answer

owned by two or more persons.

question

Partnership

answer

make up 10% of the firms; 14% of business revenues

question

Corporation

answer

owned by stockholders, in contrast to unlimited liability or proprietorship and partnerships, the owners' liability is limited to their explicit investment.

question

Corporation

answer

18% of the firms; 82% of business revenue.

question

Limited Liability Company (LLC)

answer

a form of business ownership that offers both limited liability to its owners and flexible tax treatment.

question

Accounting profit

answer

total revenue minus the total out of pocket costs.

question

Short run

answer

a period of time so short that the firm's level of plant and heavy equipment (capital) is fixed.

question

Long run

answer

a period of time sufficient for the firm to alter all factors of production.

question

Total fixed costs (TFC)

answer

costs that remain unchanged in the short run when output is altered.

question

Average fixed costs (AFC)

answer

fixed costs per unit (TFC/output)
decline as the output expands.

question

Total variable cost (TVC)

answer

sum of costs that increase as output expands
ex: cost of labor, raw materials.

question

Average variable costs (AVC)

answer

variable costs per unit (TVC/ output).

question

Total cost (TC)

answer

total fixed cost + total variable cost.

question

Average total cost (ATC)

answer

average fixed cost + average variable cost or TC/ output.

question

Marginal cost (MC)

answer

increase in total cost associated with one-unit increase in production
typically, MC will decline initially, reach a minimum, and then rise.

question

Law of diminishing returns

answer

as more units of a factor of production are added to other factors of production, after some point total output continues to increase but at a diminishing rate.

question

Total product

answer

total output of a good associated with different levels of a variable input.

question

Marginal product

answer

the change in total product due to a one unit increase in the variable input.

question

Average product

answer

total product divided by the number of units of the variable input.

question

Sunk costs

answer

historical costs associated with past decisions that can't be changed.

question

Economic profit

answer

total revenue MINUS total out of pocket costs MINUS opportunity costs

question

Economic profit

answer

total revenue MINUS explicit costs MINUS implicit costs

question

Zero economic profit

answer

referred to as normal profit rate

question

Short run (SR)

answer

a period of time in which AT LEAST ONE input is fixed.

question

Long Run (LR)

answer

a period of time in which ALL inputs are variable (none are fixed).

question

Some costs are fixed

answer

they don't vary with quantity.

question

Some costs are variable

answer

they vary with quantity.

question

Average costs are

answer

per unit costs

question

Marginal cost is the

answer

change in total cost.

question

The ability of a firm to make stuff (its production)

answer

is intimately tied to costs.

question

Why does MC (marginal cost) fall first

answer

increasing marginal returns (each additional input adds more to total output than the previous input); learning by doing.

question

Why does MC (marginal cost) rise later

answer

rises because of diminishing marginal returns; at some point each additional input adds less to total output than the previous input; since more and more input is required, marginal cost rises rapidly.

question

The average

answer

chases the margin.

question

What is the relationship between MC and ATC

answer

When MC < ATC, ATC is falling
When MC > ATC, ATC is rising.

question

In order to produce larger quantities, the firm will need to

answer

"get bigger", which means that they will need to increase their capital. These are typically expensive so capital costs become large which drives up the LR (long run) ATC.

question

Economics of scale

answer

factors that cause a producer's average cost per unit to fall as output rises.

question

Economics of scales means the

answer

benefit is getting bigger (ATC is falling).

question

Diseconomies of scale

answer

the situation in which a firm's long-run average costs rise as the firm increases output.

question

Diseconomies of scale means the

answer

benefit is negative (ATC is rising).

question

In the short run,

answer

diminishing returns determine the shape of the cost curves.

question

In the long run,

answer

economies of scale determine the shape of the cost curves.

question

Higher cost shift curves up

answer

resources become more expensive, higher taxes, more/stricter regulations, older technology.

question

Lower costs shift curves down

answer

resources become less expensive, lower taxes, less regulation, newer technology.

question

When cost curves shift up,

answer

supply shifts left

question

When cost curves shift down,

answer

supply shifts right.

question

Some costs should be ignored

answer

sunk costs cannot be reversed or recovered, therefore they should be ignored when making decisions about the future.

1 of 63

question

Long-run diseconomies of scale exist over the range of output for which the long-run average total cost curve

answer

rises

question

Economists refer to historical costs (irreversible costs already incurred) as

answer

sunk costs.

question

Suppose a professor gives up her teaching job to devote her time to writing textbooks. If salaries of professors rise,

answer

her economic profit from textbooks will fall.

question

For a firm that wants to remain in business, which of the following costs could be avoided if it halted current production

answer

variable costs.

question

If average fixed costs equal $60 and average total costs equal $120 when output is 100, the total variable cost must be

answer

$6,000.

question

Which of the following is an implication of the law of diminishing returns

answer

in the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.

question

If a firm increases its output and finds that its average total cost decreases as a result, this implies that

answer

average total cost exceeds marginal cost.

question

In the short run, the firm's average fixed cost

answer

always decline as output increases.

question

Which of the following provides the best explanation for diseconomies of scale

answer

large management structures may be bureaucratic and inefficient.

question

Which of the following would cause a firm's cost curves to shift upward

answer

an increase in government regulations.

question

Residual claimants

answer

persons who share in the profits of a business firm.

question

Contracting

answer

owner contracts with individual workers who work independently.

question

Team production

answer

workers are hired by a firm to work together under supervision.

question

Shirking

answer

The behavior of a worker who is putting forth less than the agreed-to effort.

question

Principal-agent problem

answer

the incentive problem that arises when the lack of information makes it difficult for the purchaser (principal) to determine whether the seller (agent) is acting in the principal's best interest.

question

Proprietorship

answer

a business owned and run by just one person.

question

Proprietorship

answer

make up 72% of firms, but only 4% of total business revenue

question

Partnership

answer

owned by two or more persons.

question

Partnership

answer

make up 10% of the firms; 14% of business revenues

question

Corporation

answer

owned by stockholders, in contrast to unlimited liability or proprietorship and partnerships, the owners' liability is limited to their explicit investment.

question

Corporation

answer

18% of the firms; 82% of business revenue.

question

Limited Liability Company (LLC)

answer

a form of business ownership that offers both limited liability to its owners and flexible tax treatment.

question

Accounting profit

answer

total revenue minus the total out of pocket costs.

question

Short run

answer

a period of time so short that the firm's level of plant and heavy equipment (capital) is fixed.

question

Long run

answer

a period of time sufficient for the firm to alter all factors of production.

question

Total fixed costs (TFC)

answer

costs that remain unchanged in the short run when output is altered.

question

Average fixed costs (AFC)

answer

fixed costs per unit (TFC/output)
decline as the output expands.

question

Total variable cost (TVC)

answer

sum of costs that increase as output expands
ex: cost of labor, raw materials.

question

Average variable costs (AVC)

answer

variable costs per unit (TVC/ output).

question

Total cost (TC)

answer

total fixed cost + total variable cost.

question

Average total cost (ATC)

answer

average fixed cost + average variable cost or TC/ output.

question

Marginal cost (MC)

answer

increase in total cost associated with one-unit increase in production
typically, MC will decline initially, reach a minimum, and then rise.

question

Law of diminishing returns

answer

as more units of a factor of production are added to other factors of production, after some point total output continues to increase but at a diminishing rate.

question

Total product

answer

total output of a good associated with different levels of a variable input.

question

Marginal product

answer

the change in total product due to a one unit increase in the variable input.

question

Average product

answer

total product divided by the number of units of the variable input.

question

Sunk costs

answer

historical costs associated with past decisions that can't be changed.

question

Economic profit

answer

total revenue MINUS total out of pocket costs MINUS opportunity costs

question

Economic profit

answer

total revenue MINUS explicit costs MINUS implicit costs

question

Zero economic profit

answer

referred to as normal profit rate

question

Short run (SR)

answer

a period of time in which AT LEAST ONE input is fixed.

question

Long Run (LR)

answer

a period of time in which ALL inputs are variable (none are fixed).

question

Some costs are fixed

answer

they don't vary with quantity.

question

Some costs are variable

answer

they vary with quantity.

question

Average costs are

answer

per unit costs

question

Marginal cost is the

answer

change in total cost.

question

The ability of a firm to make stuff (its production)

answer

is intimately tied to costs.

question

Why does MC (marginal cost) fall first

answer

increasing marginal returns (each additional input adds more to total output than the previous input); learning by doing.

question

Why does MC (marginal cost) rise later

answer

question

The average

answer

chases the margin.

question

What is the relationship between MC and ATC

answer

When MC < ATC, ATC is falling
When MC > ATC, ATC is rising.

question

In order to produce larger quantities, the firm will need to

answer

"get bigger", which means that they will need to increase their capital. These are typically expensive so capital costs become large which drives up the LR (long run) ATC.

question

Economics of scale

answer

factors that cause a producer's average cost per unit to fall as output rises.

question

Economics of scales means the

answer

benefit is getting bigger (ATC is falling).

question

Diseconomies of scale

answer

the situation in which a firm's long-run average costs rise as the firm increases output.

question

Diseconomies of scale means the

answer

benefit is negative (ATC is rising).

question

In the short run,

answer

diminishing returns determine the shape of the cost curves.

question

In the long run,

answer

economies of scale determine the shape of the cost curves.

question

Higher cost shift curves up

answer

resources become more expensive, higher taxes, more/stricter regulations, older technology.

question

Lower costs shift curves down

answer

resources become less expensive, lower taxes, less regulation, newer technology.

question

When cost curves shift up,

answer

supply shifts left

question

When cost curves shift down,

answer

supply shifts right.

question

Some costs should be ignored

answer

sunk costs cannot be reversed or recovered, therefore they should be ignored when making decisions about the future.

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