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accounting profit
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accountants measure a firm's profit to ensure that the firm pays the correct amount of tax and to show its investors how their funds are being used.
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economic profit
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economists measure a firm's profit to enable them to predict the firm's decisions, and the goal of these decisions is to maximize economic profit.
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accounting profit equation
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profit = total revenue - total cost
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economic profit equation
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profit = overall revenue - explicit costs - implicit costs
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Accounting cost
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accountants use internal revenue service rules based on standards established by the Financial Accounting Standards Board to calculate a firm's depreciation cost
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Opportuniy cost
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the value of the best alternative use of the resources that a firm uses in production. A firm's opportunity cost of production is the sum of the cost of using resources bought in the market, owned by the firm, supplied by the firm's owner.
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Bought in the market
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the firm incurs an opportunity cost when it buys resources in the market
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Resources owned by the firm
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if the firm owns capital and uses it to produce its output, then the firm incurs an opportunity cost
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Supplied by the firm's owner
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the firm implicitly rents the capital from itself. the firm's opportunity cost of using the capital it owns is called the implicit rental rate of capital
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Economic profit
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total revenue minus total cost, with total cost measured as the opportunity cost of production
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Normal profit
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the cost of entrepreneurship and is an opportunity cost of production
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Perfect competition
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-is a market structure with many firms and many buyers
-all firms sell an identical product
-no restrictions on entry of new firms to the industry
-both firms and buyers are well informed about the prices and products of all firms in the industry
-all firms sell an identical product
-no restrictions on entry of new firms to the industry
-both firms and buyers are well informed about the prices and products of all firms in the industry
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Perfect competition examples
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-world markets in wheat, corn, and other grains
-online purchases
-online purchases
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Monopolistic competition
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-is a market structure with many firms
-each firm produces similar but slightly different products
-each firm possesses an element of market power
-no restrictions on entry of new firms to the industry
-each firm produces similar but slightly different products
-each firm possesses an element of market power
-no restrictions on entry of new firms to the industry
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Monopolistic competition examples
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-restaurants
-hairdressers
-clothing
-t.v. programmers
-hairdressers
-clothing
-t.v. programmers
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Oligopoly
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-is a market structure in which a small number of firms compete
-the firms might produce almost identical products or differentiated products
-barriers to entry limit entry into the market
-the firms might produce almost identical products or differentiated products
-barriers to entry limit entry into the market
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Oligopoly examples
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-cellular networks
-air transportation
-music industry
-funeral services
-air transportation
-music industry
-funeral services
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Monopoly
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-is a market structure in which one firm produces the entire output of the industry
-there are no close substitutes for the product
-there are barriers to entry that protect the firm from competition by entering firms
-there are no close substitutes for the product
-there are barriers to entry that protect the firm from competition by entering firms
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Monopoly examples
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-google
-facebook
-railways
-microsoft
-railways
-microsoft
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Total product (TP)
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the total output produced in a given period
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Total product formula
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total product = average product x labor
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Total product curve
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the change in total products that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same
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Marginal product (MP)
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marginal product = change in input / change in output
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Marginal product formula
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is equal to total product divided by the quantity of labor employed
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Marginal product curve
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average product = total product / labor
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Average product (AP)
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when marginal product exceeds average product
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Average product formula
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when marginal product is below average product
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Average product curve
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when marginal product equals average product
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Average product increases
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the cost of the firm's fixed inputs; variable costs do not change with output
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Average product decreases
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TFC = TC - TVC
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Average product is at its maximum
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the cost of the firm's variable inputs; variable costs do not change with output
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Total Fixed Cost (TFC)
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TVC = variable cost per unit x quantity output
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Total Fixed Cost formula
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the cost of all resources used
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Total Fixed Cost curve
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TC = TFC + TVC
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Total Variable Cost (TVC)
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total fixed cost per unit of output
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Total Variable Cost formula
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AFC = TFC/Q (output)
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Total Variable Cost curve
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total variable cost per unit of output
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Total Cost (TC)
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AVC = TVC/Q (output)
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Total Cost Formula
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total costs per unit of output
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Total Cost curve
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ATC = TC/Q (output)
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Average Fixed Cost (AFC)
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the increase in total cost that results from a one-unit increase in total product
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Average Fixed Cost formula
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change in total cost / change in output
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Average Fixed Cost curve
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a level of production in which the marginal product of labor increases as the number of workers increases
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Average Variable Cost (AVC)
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as a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable eventually diminishes
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Average Variable Cost formula
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the firm's cost curves are linked to its product curves
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Average Variable Cost curve
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-technological change influences both the product curves and the cost curves
-an increase in productivity shifts the product curves upward and the cost curves downward
-an increase in productivity shifts the product curves upward and the cost curves downward
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Average Total Cost (ATC)
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the relationship between the lowest attainable average total cost and output when both the plant and labor are varied (U-shaped)
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Average Total Cost formula
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is U-shaped with decreasing average costs at low levels of output and increasing average costs at high levels of output.
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Average Total Cost curve
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-long run average cost curve allows all factors of production to change
-short run average cost curve allow only variable costs to change
-short run average cost curve allow only variable costs to change
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Marginal Cost (MC)
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are features of a firm's technology that lead to falling long-run average cost as output increases
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Marginal Cost formula
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features of a firm's technology that lead to rising long-run average cost as output increases
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Marginal Cost curve
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features of a firm's technology that lead to constant long-run average cost as output increases
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Increase Marginal Returns
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-many firms sell identical products to many buyers
-there are no restrictions on entry into the market
-established firms have no advantage over new ones
-sellers and buyers are well informed about prices
-there are no restrictions on entry into the market
-established firms have no advantage over new ones
-sellers and buyers are well informed about prices
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The Law of Diminishing Marginal Returns
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-demand curve shows the relationship between the quantity of a product a single consumer is willing to buy and its price (slopes downward)
-market demand curve shows the relationship between the quantity of a product that all consumers in the market are willing to buy and its price (slopes downward)
-market demand curve shows the relationship between the quantity of a product that all consumers in the market are willing to buy and its price (slopes downward)
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Production Curves & Cost Curves
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market value
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PC & CC technology
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economic depreciation
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Long Run Average Cost Curve
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include the cost of using resources owned by the firm
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Short Run Average Cost Curve
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There is not enough information to determine his economic profit, if any
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Long Run Average Cost vs Short Run Average Cost
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$200,000 per year
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Economies of Scale
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$45,000
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Diseconomies of Scale
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economic depreciation and forgone interest
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Constant Returns to Sale
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economic profits
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Characteristics of Perfect Competition
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the entrepreneur is making only a normal profit
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Demand Curve versus Market Demand Curve
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at least one factor of production cannot be varied
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Over a given period, economic depreciation is the change in capital equipment's
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capital equipment
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The difference between the market price of a new car used by a firm and the market price of the same car one year later is known as
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none of the above because all factors are variable in the long run
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A firm's opportunity costs ________.
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maximum output attainable for each quantity of labor employed
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Joe quits his job as an insurance agent and opens his own sporting goods store. If his profits as measured by his accountant are greater than zero, then
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increase in the total product that results from hiring one more worker with all other inputs remaining the same
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Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's economic profit is equal to
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increasing specialization of tasks
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An electrician quits her current job, which pays $40,000 per year. She can take a job with another firm for $45,000 per year or work for herself. The opportunity cost of working for herself is
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the capital resources used by the firm are fixed in the short run
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Which of the following are two components of the opportunity cost of using capital already owned by the firm?
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increasing marginal returns and then diminishing marginal returns
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Among the opportunity costs of a firm are all of the following EXCEPT
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short run; fall
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If economic profit is equal to zero, then
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When marginal product is less than average product, average product is decreasing
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Economists define the short run as a period of time so short that
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average product must be at its maximum value
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An example of a short-run fixed factor of production is
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in the short run but not in the long run
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Which of the following factors is fixed in the long run?
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$400
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When the total product curve is drawn in a figure that measures employment along the horizontal axis, it is a graph that shows the
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first decreases and then increases
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The marginal product of labor is equal to the
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leaves marginal cost unchanged
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Increasing marginal returns to labor might occur at low levels of labor input because of
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always decreases
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Diminishing marginal returns to labor occur because
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$9.44
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A firm's total product curve shows that at first it has
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$1000
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The law of diminishing returns makes it clear that as more a variable input is employed, in the ________ the marginal product of the variable input eventually will ________.
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increases; does not change; increases
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Which of the following statements is TRUE?
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average variable cost
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When the marginal and average products of labor are equal to each other, the
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average total cost increases as output increases
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A firm has fixed costs
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shifts both its MC curve and its ATC curve downward
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The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total cost of producing 50 bikes?
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Marginal cost ________ as the quantity produced is increased.
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A decrease in the price of a fixed factor of production decreases total cost and
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As output increases, average fixed cost
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Sandra's Sweaters' production function is shown in the above table. Sandra rents three knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. If Sandra produces 18 sweaters per day, what is her average total cost?
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The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the total fixed cost of producing 4,500 frijoles?
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As output increases, total cost ________, total fixed cost ________, and total variable cost ________.
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In the figure above, curve C is the ________ curve.
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When marginal cost is greater than average total cost, the
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Sticky Cakes is a bakery. A decrease in the wage rate that Sticky Cakes pays its workers
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