Mankiw Part 5: Chapters 13-14 - Assignment Essays

question

total revenue =

answer

Price x Quantity

question

total cost =

answer

well, it's complicated

question

explicit costs

answer

opportunity costs that require an outlay of money by the firm: flour, machines, rent

question

implicit costs

answer

opportunity costs that are intangible: time, practice, career, etc.

question

Economists vs Accountants

answer

economists take into account explicit and implicit costs, while accountants only take into account explicit costs

question

economic profit =

answer

total revenue - explicit costs - implicit costs

question

accounting profit =

answer

total revenue - explicit costs

question

why economic profit matters

answer

it determines whether the business flourishes or shuts down; when a firm is making economic profit, it is doing well--when a firm is making economic losses, it is on its way to death

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

marginal product (MP)

answer

the increase in output that arises from an additional unit of input

question

diminishing marginal product

answer

the property whereby the marginal product of an input declines as the quantity of the input increases (more workers means more crowded working conditions, so less cookies are produced)

question

slope of the production function

answer

measures the marginal product of a worker

question

total-cost curve

answer

compares quantity of output (x) with total cost (y), and gets steeper as output increases

question

fixed costs

answer

those unaffected by quantity of output produced: rent, salaries, etc.

question

variable costs

answer

those affected by quantity of output produced: coffee beans, milk, etc.

question

total cost =

answer

fixed cost + variable cost

question

average total cost (ATC) =

answer

total cost/quantity output = average fixed cost + average variable cost

question

average fixed cost =

answer

fixed cost/quantity

question

average variable cost =

answer

variable cost/quantity

question

marginal cost (MC)

answer

the change in total costs associated with a one-unit change in output

question

efficiency scale

answer

the quantity of output that minimizes average total cost

question

marginal cost (MC) and average total cost (ATC)

answer

If MC is less than ATC, ATC is falling. If MC is greater than ATC, ATC is rising

question

Where does the MC curve intersect the ATC curve?

answer

at the lowest point of the ATC curve; minimum ATC

question

average variable cost (AVC) curve is what shape?

answer

U-shaped

question

average total cost (ATC) curve is what shape?

answer

U-shaped

question

fixed costs in the long term

answer

can become variable costs; building a new factory to increase output can't happen in a day, but it can over several years

question

Why do long-run curves differ from short-run curves?

answer

Because many decisions are fixed in the short run, but variable in the long run

question

long-run ATC curve shape

answer

Also u-shaped, but wider and flatter than short-run ATC curve, with all short-run ATC curves lying on/above the long-run curve

question

economies of scale

answer

the property whereby long-run average total cost falls as the quantity of output increases

question

diseconomies of scale

answer

the property whereby long-run average total cost rises as the quantity of output increases

question

causes of economies of scale

answer

better production methods: e.g., more specialized workers, assembly lines

question

causes of diseconomies of scale

answer

failure to manage: overstretched management

question

phenomena of long-run ATC

answer

falls at low production levels because of increasing specialization, rises at high production levels because of coordination problems

question

competitive market/perfectly competitive market

answer

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

question

Average Revenue (AR)

answer

total revenue divided by the quantity sold

question

for competitive firms, average revenue (AR) is equivalent to

answer

the price of the good

question

Marginal Revenue (MR)

answer

change in total revenue divided by change in quantity

question

for competitive firms, marginal revenue is equivalent to

answer

the price of the good

question

if marginal revenue is greater than marginal cost

answer

the firm should increase its output

question

If marginal revenue is less than marginal cost

answer

the firm should decrease output

question

at Qmax,

answer

MR (price) = MC (supply curve)

question

For a competitive firm, the MC curve is equivalent to the firm's

answer

supply curve

question

Shutdown vs. Exit

answer

-Shutdown: a short-run decision not to produce anything because of market conditions
-Exit: A long-run decision to leave the market

question

sunk cost

answer

a fixed cost during a shutdown period that cannot be recovered

question

A firm shuts down if

answer

potential product revenue is less than its variable production costs (TR < VC)

question

TR < VC can be rewritten as

answer

TR/Q < VC/Q = AR < AVC = P < AVC

question

the MC curve of a competitive firm represents:

answer

its supply curve when above AVC, and it shutdown point when below the AVC

question

A firm exits if

answer

TR > TC = P < ATC

question

A firm will re enter the market if

answer

P > ATC

question

Another way to write Profit = TR - TC is

answer

Profit = (P - ATC) * Q

question

If price is above ATC:

answer

profit is positive and new firms enter the market

question

If price is below ATC:

answer

profit is negative and firms leave the market

question

If price is equal to ATC:

answer

profit is 0 and the market remains the same in firm count

question

efficient scale

answer

the quantity of output that minimizes average total cost (MC = ATC)

question

To reach equilibrium in a competitive market with free entry and exit,

answer

firms must be operating at their efficient scale

question

In a market with free entry and exit,

answer

the only price consistent with zero profit is the minimum ATC

question

How much profit do competitive firms earn in the long run through the perspective of an economist?

answer

ZEROOOOOO

question

How much profit do competitive firms earn in the long run through the perspective of an accountant?

answer

A positive amount bc they don't take into account implicit costs bcos they're weird liek that

question

When does the long-run supply curve slope upwards?

answer

When an increase in production cost leads to an increase in price

question

Marginal firm

answer

the firm that would exit the market if the price were any lower

question

The price in the market reflects what?

answer

The ATC of the marginal firm; that which would leave if the price were any lower

question

The marginal firm earns how much profit?

answer

ZEROOOOOO

question

While the marginal firm earns zero profit, what do other firms earn?

answer

Some profit, or a lot

1 of 63

question

total revenue =

answer

Price x Quantity

question

total cost =

answer

well, it's complicated

question

explicit costs

answer

opportunity costs that require an outlay of money by the firm: flour, machines, rent

question

implicit costs

answer

opportunity costs that are intangible: time, practice, career, etc.

question

Economists vs Accountants

answer

economists take into account explicit and implicit costs, while accountants only take into account explicit costs

question

economic profit =

answer

total revenue - explicit costs - implicit costs

question

accounting profit =

answer

total revenue - explicit costs

question

why economic profit matters

answer

it determines whether the business flourishes or shuts down; when a firm is making economic profit, it is doing well--when a firm is making economic losses, it is on its way to death

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

marginal product (MP)

answer

the increase in output that arises from an additional unit of input

question

diminishing marginal product

answer

the property whereby the marginal product of an input declines as the quantity of the input increases (more workers means more crowded working conditions, so less cookies are produced)

question

slope of the production function

answer

measures the marginal product of a worker

question

total-cost curve

answer

compares quantity of output (x) with total cost (y), and gets steeper as output increases

question

fixed costs

answer

those unaffected by quantity of output produced: rent, salaries, etc.

question

variable costs

answer

those affected by quantity of output produced: coffee beans, milk, etc.

question

total cost =

answer

fixed cost + variable cost

question

average total cost (ATC) =

answer

total cost/quantity output = average fixed cost + average variable cost

question

average fixed cost =

answer

fixed cost/quantity

question

average variable cost =

answer

variable cost/quantity

question

marginal cost (MC)

answer

the change in total costs associated with a one-unit change in output

question

efficiency scale

answer

the quantity of output that minimizes average total cost

question

marginal cost (MC) and average total cost (ATC)

answer

If MC is less than ATC, ATC is falling. If MC is greater than ATC, ATC is rising

question

Where does the MC curve intersect the ATC curve?

answer

at the lowest point of the ATC curve; minimum ATC

question

average variable cost (AVC) curve is what shape?

answer

U-shaped

question

average total cost (ATC) curve is what shape?

answer

U-shaped

question

fixed costs in the long term

answer

can become variable costs; building a new factory to increase output can't happen in a day, but it can over several years

question

Why do long-run curves differ from short-run curves?

answer

Because many decisions are fixed in the short run, but variable in the long run

question

long-run ATC curve shape

answer

Also u-shaped, but wider and flatter than short-run ATC curve, with all short-run ATC curves lying on/above the long-run curve

question

economies of scale

answer

the property whereby long-run average total cost falls as the quantity of output increases

question

diseconomies of scale

answer

the property whereby long-run average total cost rises as the quantity of output increases

question

causes of economies of scale

answer

better production methods: e.g., more specialized workers, assembly lines

question

causes of diseconomies of scale

answer

failure to manage: overstretched management

question

phenomena of long-run ATC

answer

falls at low production levels because of increasing specialization, rises at high production levels because of coordination problems

question

competitive market/perfectly competitive market

answer

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

question

Average Revenue (AR)

answer

total revenue divided by the quantity sold

question

for competitive firms, average revenue (AR) is equivalent to

answer

the price of the good

question

Marginal Revenue (MR)

answer

change in total revenue divided by change in quantity

question

for competitive firms, marginal revenue is equivalent to

answer

the price of the good

question

if marginal revenue is greater than marginal cost

answer

the firm should increase its output

question

If marginal revenue is less than marginal cost

answer

the firm should decrease output

question

at Qmax,

answer

MR (price) = MC (supply curve)

question

For a competitive firm, the MC curve is equivalent to the firm's

answer

supply curve

question

Shutdown vs. Exit

answer

-Shutdown: a short-run decision not to produce anything because of market conditions
-Exit: A long-run decision to leave the market

question

sunk cost

answer

a fixed cost during a shutdown period that cannot be recovered

question

A firm shuts down if

answer

potential product revenue is less than its variable production costs (TR < VC)

question

TR < VC can be rewritten as

answer

TR/Q < VC/Q = AR < AVC = P < AVC

question

the MC curve of a competitive firm represents:

answer

its supply curve when above AVC, and it shutdown point when below the AVC

question

A firm exits if

answer

TR > TC = P < ATC

question

A firm will re enter the market if

answer

P > ATC

question

Another way to write Profit = TR - TC is

answer

Profit = (P - ATC) * Q

question

If price is above ATC:

answer

profit is positive and new firms enter the market

question

If price is below ATC:

answer

profit is negative and firms leave the market

question

If price is equal to ATC:

answer

profit is 0 and the market remains the same in firm count

question

efficient scale

answer

the quantity of output that minimizes average total cost (MC = ATC)

question

To reach equilibrium in a competitive market with free entry and exit,

answer

firms must be operating at their efficient scale

question

In a market with free entry and exit,

answer

the only price consistent with zero profit is the minimum ATC

question

How much profit do competitive firms earn in the long run through the perspective of an economist?

answer

ZEROOOOOO

question

How much profit do competitive firms earn in the long run through the perspective of an accountant?

answer

A positive amount bc they don't take into account implicit costs bcos they're weird liek that

question

When does the long-run supply curve slope upwards?

answer

When an increase in production cost leads to an increase in price

question

Marginal firm

answer

the firm that would exit the market if the price were any lower

question

The price in the market reflects what?

answer

The ATC of the marginal firm; that which would leave if the price were any lower

question

The marginal firm earns how much profit?

answer

ZEROOOOOO

question

While the marginal firm earns zero profit, what do other firms earn?

answer

Some profit, or a lot

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