question
(assumptions) What are the 2 goals of firms?
answer
1- Firms are profit-maximizing
2- Each firm is assumed to be single, consistent and a decision making unit.
2- Each firm is assumed to be single, consistent and a decision making unit.
question
What are the 2 competing views on maximizing profits?
answer
1- Profit-maximizing is unadorned capitalism ; it does not serve the broader public interest
2- The goal of maximizing profits leads to innovation and improves living standards
2- The goal of maximizing profits leads to innovation and improves living standards
question
What are four types of inputs of production?
answer
1- inputs that are outputs from other firms (Intermediate products)
2- Inputs provided by nature
3- Inputs that are services of labor
4- Inputs that are services of physical capital
2- Inputs provided by nature
3- Inputs that are services of labor
4- Inputs that are services of physical capital
question
What is the purpose of the production function?
answer
It shows the maximum output a firm can produced by a combination of inputs
question
What type of concept is production?
answer
Flow concept
question
Production is a function of what variables?
answer
Q= f( Labor, Capital)
question
What are explicit costs?
answer
It involves a purchase of goods / services by firm
question
What do the explicit cost include?
answer
Hiring of workers, rental equipment, interest payment on debt, purchase of intermediate inputs, wages/salary, rent, interest on loan
question
What do explicit cost already include?
answer
The wear out of old physical capital (depreciation)
question
What are implicit costs?
answer
It is the costs of items for which there is no market transaction but still an opportunity cost for the firm
question
What do implicit cost include?
answer
It includes: CEO salary/time, opportunity cost of the owner's capital, depreciation of machinery for capital projects, loss of interest income on funds, risk free return, risk premium
question
What is the equation for accounting profits? Is accounting profits greater or smaller than economic profits?
answer
revenues - explicit costs
Accounting is greater because it excludes implicit costs ----- more profits
Accounting is greater because it excludes implicit costs ----- more profits
question
What is the equation for economic profits?
answer
Revenues- (explicit costs +implicit costs)
OR Accounting profits - implicits costs
OR Accounting profits - implicits costs
question
What are called negative economic profits?
answer
Losses and hint at the exit of firms from the market
question
What is the definition of Short-Run? What are some examples of fixed factors?
answer
It is a time period in which the quantities of some fixed factors cannot be changed.
Ex. element of capital, land, services of management, supply of skilled labor
Ex. element of capital, land, services of management, supply of skilled labor
question
What are variable factors?
answer
There are inputs that are not fixed therefore can vary,
ex. Raw material, power, fuel, ordinary labor
ex. Raw material, power, fuel, ordinary labor
question
What is the total cost equal to?
answer
TC = Total variable cost + total fixed cost
question
What is the Average total cost equal to?
answer
Average Variable cost + Average fixed cost
question
What is the definition of long-run?
answer
It is the length of time over which all the firm's factor of production can be varied and technology is fixed.
question
What is the definition of very long run?
answer
Firm's factor of production and technology can vary.
question
What is the definition of Total product (TP) in the short-run?
answer
It is the total amount produced during a given period of time
question
What is the Average product (AP)?
answer
It is the total product divided by the number of variable units to produce it
= TP/L or Q/L
= TP/L or Q/L
question
What is the marginal product?
answer
It is the change in total product divided by change of variable factor = change TP / Change L
question
What does the slope of the production function equal to?
answer
It is equal to the average product (TP/L)
question
What does it mean when the 45 degree line is tangent to the production function?
answer
It means that the slope is increasing at a decreasing rate (law of diminishing returns) i.e the average product is falling
question
As of the production function for AVERAGE and MARGINAL product, what does the average product mean? What does the marginal product mean? What is the condition for the top of the marginal product curve mean?
answer
The average product curve = for every given level of labor, what is the output (Q) and the average of that level.
Marginal product is the additional worker need to produce more than the first worker's average
Top of marginal curve hints at the beginning of the law of diminishing marginal productivity (mp greater than ap)
Marginal product is the additional worker need to produce more than the first worker's average
Top of marginal curve hints at the beginning of the law of diminishing marginal productivity (mp greater than ap)
question
What does the intersection on the average and marginal production function mean ?
answer
mp = ap point of diminishing average productivity (highest average productivity)
question
What does mp=ap mean?
answer
The average productivity is at its highest
question
What does AP greater than MP mean?
answer
Average product is falling
question
What does MP greater than AP mean?
answer
Workers are producing more than the average on the first unit of labor (Average product is increasing)
question
What is the law of diminishing marginal returns?
answer
States that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee
question
What is the definition of marginal cost?
answer
It is the increase in total cost resulting from increasing output by 1 unit
question
What is the equation of marginal cost?
answer
Change in TC/change in Q
question
What type of cost are marginal costs and why?
answer
They are variable costs because they change as output changes.
question
What is the difference between TC and the TVC curve?
answer
the total fixed cost
question
What is the difference between the AVC and ATC curve?
answer
Average total cost
question
which minimum is the to the left and which is to the right?
AVC and ATC
AVC and ATC
answer
AVC minimum is to the right and lower of the ATC minimum
question
Is AVC falling or increasing to the right of its minimum?
answer
AVC falls until it reaches its minimum on the marginal and average costs curves
question
Where on a marginal and average cost curve is the profit-maximizing point?
answer
It is the minimum point on the ATC curve where MC=ATC
question
What is the relationship between marginal product and marginal cost?
answer
As MP increases, MC decreases
question
As soon as MC starts increases, what does that hint us?
answer
That there is diminishing marginal returns and marginal product is decreasing
question
why is MC and AVC curves U-shaped?
answer
Each additional worker adds the same amount to total cost but different amount to total output.
question
AVC at its minimum =
answer
AP at its maximum
question
When MC reaches its minimum=
answer
MP reaches its maximum
question
What is referred to as the capacity of a firm?
answer
It refers to the level of output that corresponds to the minimum short-run ATC OR at the profit-maximizing point OR lowest average cost we can get
question
What does it mean when a firm is producing at output smaller than the minimum ATC?
answer
Firm is operating at excess capacity
question
What happens when there is an increase in the price of variable factors?
answer
ATC curve shifts up
MC curve shifts up
MC curve shifts up
question
What happens when there is an increase in the price of fixed variable factors?
answer
Fixed costs curve goes up
ATC shifts up
MC does not move
ATC shifts up
MC does not move
question
What happens when there is an excess in labor?
answer
upward shift of MC, ATC, AVC curve
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