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Technology
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The processes a firm uses to turn inputs into outputs of goods and services.
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Technological change
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A change in the ability of a firm to produce a given level of output with a given quantity of inputs.
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short run
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The period of time during which at least one of a firm's inputs is fixed.
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long run
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the firm can vary all of its inputs, adopt new technology, and increase or decrease the size of its physical plant
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Variable costs
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costs that change as output changes, while
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Fixed costs
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costs that remain constant as output changes
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Total Cost
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fixed cost + variable cost
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Explicit cost
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A cost that involves spending money
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Implicit cost
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A nonmonetary opportunity cost
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production function
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the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.
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average total cost
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total cost divided by the quantity of output
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marginal product of labor
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the additional output a firm produces as a result of hiring one more worker.
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Law of diminishing returns
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The principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.
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average product of labor
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the total output produced by a firm divided by the quantity of workers.
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marginal cost
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the change in a firm's total cost from producing one more unit of a good or service
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long-run average cost curve
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shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.
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economies of scale
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the firm's long-run average costs falling as it increases the quantity of output it produces.
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minimum efficient scale.
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The lowest level of output at which all economies of scale are exhausted
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constant returns to scale
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its long-run average cost remains unchanged as it increases output.
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diseconomies of scale
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a situation in which a firm's long-run average costs rise as the firm increases output.
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Isocost line
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All the combinations of two inputs, such as capital and labor, the have the same total cost.
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marginal rate of technical substitution (MRTS).
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The slope of an isoquant describes how many units of capital are required to compensate for a unit of labor, keeping production constant.
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Suppose a pizza parlor has the following production costs: $3.00
in labor per pizza, $4.00
in ingredients per pizza, $0.90
in electricity per pizza, $1 comma 500
in restaurant rent per month, and $500
in insurance per month.
Assume the pizza parlor produces 9,000
pizzas per month.
What is the variable cost of production (per month)?
The variable cost of production is $______
What is the fixed cost of production (per month)?
The fixed cost of production is $______
in labor per pizza, $4.00
in ingredients per pizza, $0.90
in electricity per pizza, $1 comma 500
in restaurant rent per month, and $500
in insurance per month.
Assume the pizza parlor produces 9,000
pizzas per month.
What is the variable cost of production (per month)?
The variable cost of production is $______
What is the fixed cost of production (per month)?
The fixed cost of production is $______
answer
71100, 2000
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What is the production function?
The production function is the relationship between
The production function is the relationship between
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the inputs employed by a firm and the maximum output it can produce with those inputs.
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What is the difference in the short run and the long run?
In the short run,
In the short run,
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at least one of the firm's inputs is fixed, while in the long run, the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant.
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Suppose that last semester your semester GPA was 1.50
and your resulting cumulative GPA was 2.92.
Next, suppose that this semester your semester GPA will be 2.30.
If so, then your cumulative GPA
and your resulting cumulative GPA was 2.92.
Next, suppose that this semester your semester GPA will be 2.30.
If so, then your cumulative GPA
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will decrease because your "marginal" GPA will be below
your cumulative GPA.
your cumulative GPA.
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Suppose Charles owns a lawn-mowing company. Assume that without workers, no yards are mowed. When he hires one worker, he is able to mow 4 yards per day. With two workers, he can mow 10 yards per day, and with three workers, he can mow 16 yards per day.
The marginal product of the first worker is ___ yards per day.
The marginal product of the second worker is ___yards per day.
Last, the marginal product of the third worker is ___ yards per day.
The marginal product of labor potentially increases (from one to three workers) due to
The marginal product of the first worker is ___ yards per day.
The marginal product of the second worker is ___yards per day.
Last, the marginal product of the third worker is ___ yards per day.
The marginal product of labor potentially increases (from one to three workers) due to
answer
4, 6, 6, division of labor
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Which of the following is true of the relationship between the average product of labor and the marginal product of labor?
answer
Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing.
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The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve?
Graphically, the marginal cost curve is
Graphically, the marginal cost curve is
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a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
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How can marginal cost be expressed mathematically?
Marginal cost (MC) can be expressed as
Marginal cost (MC) can be expressed as
answer
MC=Change of TC / Change of Q, where TC is total cost and Q is output
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if the total cost of producing three units of output is $2,444
and the total cost of producing four units of output is $3,253,
then the marginal cost of the fourth unit is $
and the total cost of producing four units of output is $3,253,
then the marginal cost of the fourth unit is $
answer
809
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Firms experience economies of scale for several reasons. What is one such reason?
A firm might experience economies of scale because
A firm might experience economies of scale because
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as a firm expands comma it may be able to borrow money more inexpensively
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Your company incurs a cost for store rent,
which, in the short run, is fixed. What happens to this cost in the long run?
In the long run, the cost of store rent
which, in the short run, is fixed. What happens to this cost in the long run?
In the long run, the cost of store rent
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becomes a variable cost
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Any cost that remains unchanged as output changes represents a firm's
answer
fixed cost.
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Any cost that changes as output changes represents a firm's
answer
variable cost.
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Which of the following is most likely to be a fixed cost for a farmer?
answer
insurance premiums on property
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Which of the following is most likely to a variable cost for a business firm?
answer
cost of shipping products
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What is the law of diminishing returns?
The law of diminishing returns states that
The law of diminishing returns states that
answer
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
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Does the law of diminishing returns apply in the long run?
answer
No
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Which of the following is true of the relationship between the average product of labor and the marginal product of labor?
answer
Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing
.
.
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The law of diminishing returns applies
answer
in the short run
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Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
answer
Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.
question
An example of technological change is
answer
1.
being able to produce the same output using fewer inputs.
2.
being able to produce more output using the same inputs.
3.
a decline in the quantity of output that can be produced from a given quantity of inputs.
being able to produce the same output using fewer inputs.
2.
being able to produce more output using the same inputs.
3.
a decline in the quantity of output that can be produced from a given quantity of inputs.
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Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $8,000, buys gasoline $1.50 in gas is required to mow each yard), and pays a helper $10.00
per yard. Prior to opening the lawn company, Charles earned $5,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 1 percent per year in the bank and that the mowing equipment depreciates at 25 percent per year. Charles plans to mow 250 yards per year. What is Charles's implicit cost of production?
per yard. Prior to opening the lawn company, Charles earned $5,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 1 percent per year in the bank and that the mowing equipment depreciates at 25 percent per year. Charles plans to mow 250 yards per year. What is Charles's implicit cost of production?
answer
Charles's implicit cost of production is $7080 per year
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Mr. Jernigan owns a piece of land on which he grows corn. Corn production annually requires $6,000 in seed, $7,000 in fertilizer, and $8,000 in pesticides. Mr. Jernigan uses his own labor to grow the corn and therefore hires no workers. If Mr. Jernigan did not use his time to grow corn, he would instead be able to sell insurance, earning $40,000 per year.
Suppose another farmer has just offered to pay Mr. Jernigan rent of $15,000 per year for use of the land. If Mr. Jernigan refuses to rent the land to another farmer, then what will be his accounting costs from farming corn himself on his land? What will be his economic costs?
Suppose another farmer has just offered to pay Mr. Jernigan rent of $15,000 per year for use of the land. If Mr. Jernigan refuses to rent the land to another farmer, then what will be his accounting costs from farming corn himself on his land? What will be his economic costs?
answer
Mr. Jernigan's accounting costs will be $21000 per year, and his economic costs will be $76000 per year.
question
If a firm produces 20 units of output and incurs a total cost of $1,000 and a variable cost is $700, calculate the firm's average fixed cost of production if it expands output to 25 units
answer
$12
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Which of the following is the best example of a short-run adjustment?
answer
Your local Wal-Mart
hires two more associates.
hires two more associates.
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If the marginal cost curve is below the average variable cost curve, then
answer
If the marginal cost curve is below the average variable cost curve, then
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If production displays economies of scale, the long run average cost curve is
answer
If production displays economies of scale, the long run average cost curve is
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Which of the following can a firm do in the long run but not in the short run?
answer
decrease the size of its physical plant
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Which of the following explains why the marginal cost curve has a U shape?
answer
Initially, the marginal product of labor rises, then falls.
question
Which of the following would be categorized as an implicit cost?
a. not being able to spend your $10,000 savings if you sink the money in your business
b. the cost of purchasing supplies for your house-cleaning business
c. the cost of purchasing auto insurance for your dry-cleaning
delivery business
a. not being able to spend your $10,000 savings if you sink the money in your business
b. the cost of purchasing supplies for your house-cleaning business
c. the cost of purchasing auto insurance for your dry-cleaning
delivery business
answer
a only
question
When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increased to $9.4 million.
Within this range, the marginal cost of an additional unit of output is
Within this range, the marginal cost of an additional unit of output is
answer
$145.
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