THE COSTS OF PRODUCTION: CH 13

question

The wages and utility bills that Jacques pays

answer

explicit costs

question

The rental income Jacques could receive if he chose to rent out his showroom

answer

implicit costs

question

The wholesale cost for the guitars that Jacques pays the manufacturer

answer

explicit costs

question

The salary Jacques could earn if he worked as a paralegal

answer

implicit costs

question

explicit costs

answer

require an outlay of money

paying wages to workers

question

implicit costs

answer

do not require an outlay of money

opportunity costs of the owner's time

question

total cost

answer

explicit + implicit

question

accounting profit

answer

total revenue - total explicit costs

question

economic profit

answer

total revenue - total costs

question

fixed inputs

answer

where the quantity cannot be changed in the short run

question

variable input

answer

...

question

marginal product of labor

answer

The slope of the production function measures the change in output for each additional unit of labor input

change in quantity of pizza output when an additional worker is hired

question

T/F: The shape of the production function reflects the law of diminishing marginal returns.

answer

true

question

the costs of something is

answer

what you give up to get it

question

what is the explicit cost is you borrow 100,000 with a 5% interest rate?

answer

5000 interest on loan

question

what is the explicit cost what you borrow 60,000 with 5% interest rate?

answer

3000 interest on loan

question

what is the implicit cost what you use 40,000 of savings with a 5% interest rate?

answer

2000 foregone interest you could have earned on your 40,000

question

Accounting profit IGNORES _______, so it is _______ than ________

answer

implicit,

higher,

economic profit

question

The equilibrium rent on office space has just increased by $500/month.

Determine the effects on accounting profit and economic profit if: YOU RENT YOUR OWN OFFICE SPACE

the rent on office space increase $500/month

answer

Explicit costs increase $500/month.

Accounting profit & economic profit each fall $500/month.

question

The equilibrium rent on office space has just increased by $500/month.

Determine the effects on accounting profit and economic profit if: YOU OWN YOUR OWN OFFICE SPACE

answer

Explicit costs do not change, so accounting profit does not change.

Implicit costs increase $500/month (opp. cost of using your space instead of renting it) so economic profit falls by $500/month.

question

production function is the relationship between

answer

quantity of inputs used to make a good and the quantity of that good

question

production function

answer

gets flatter as production rises

question

marginal product

answer

- increase in output that arises from an addition unit of input

- other inputs constant

- slope of the production function

question

marginal product of labor, MPL

answer

if you hire one more worker,

output rises by the marginal product of labor

question

diminishing marginal product

answer

- MP of an input declines as the quantity of the input increase

- production functions gets flatter as more inputs are being used

- the slope decreases

question

why is MPL important if you hire an extra worker

answer

- costs rise by the wage you pay the worker

- output rises by MPL

- comparing them helps decide if you should hire an extra worker

question

Farmer Jack's output rises by a smaller and smaller amount for each additional worker. Why?

answer

- As Jack adds workers, the average worker has less land to work with and will be less productive.

- MPL diminishes as L rises whether the fixed input is land or capital (equipment, machines, etc.).

question

marginal cost

answer

- increase in total cost arising from an extra unit of production

- change in TC/ change in quantity

question

fixed costs

answer

do not vary with quantity of output produced

cost of equipment, loans, rent

question

variable costs

answer

vary with the quantity of output produced

wages paid, cost of materials

question

when MC < ATC

answer

ATC is falling

question

when MC > ATC

answer

ATC is rising

question

MC crosses ATC at

answer

ATC curve's minimum

question

short run

answer

some inputs are fixed

question

long run

answer

all inputs are variable

question

economies of scale

answer

ATC falls as Q rises, average total cost declines as output increases

question

constant returns to scale

answer

ATC stays the same as Q increases

question

diseconomies of scale

answer

ATC rises as Q increases, average total cost rises as output rises

question

average total cost

answer

total costs/quantity

question

Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor's lawn for $40.

Xavier has an accounting profit of _____ and an economic profit of ____.

answer

50, 10

question

Diminishing marginal product explains why, as a firm's output increases,

answer

the production function gets flatter, while the total cost curve gets steeper.

question

A firm is producing 1,000 units at a total cost of $5,000.
If it were to increase production to 1,001 units, its total cost would rise to $5,008.

What does this information tell you about the firm?

answer

Marginal cost is $8, and average total cost is $5.

question

A firm is producing 20 units with an average total cost of $25 and marginal cost of $15.

If the firm were to increase production to 21 units, which of the following must occur?

answer

ATC would decrease

question

The government imposes a $1,000 per year license fee on all pizza restaurants.

Which cost curves shift as a result?

answer

Average total cost and average fixed cost.

question

If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost.

answer

economies, falling

question

What you give up for taking some action is called the

answer

opportunity cost

question

_____ is falling when marginal cost is below it and rising when marginal cost is above it.

answer

ATC

question

A cost that does not depend on the quantity produced is a(n)

answer

fixed costs

question

In the ice-cream industry in the short run, _______ includes the cost of cream and sugar but not the cost of the factory.

answer

variable cost

question

Profits equal total revenue minus

answer

total cost

question

The cost of producing an extra unit of output is the

answer

marginal cost

question

Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock.

In addition, she would have to quit her $50,000 per year job as an accountant.

What is the opportunity cost of something?

answer

What must be given up to acquire it

1 of 52

question

The wages and utility bills that Jacques pays

answer

explicit costs

question

The rental income Jacques could receive if he chose to rent out his showroom

answer

implicit costs

question

The wholesale cost for the guitars that Jacques pays the manufacturer

answer

explicit costs

question

The salary Jacques could earn if he worked as a paralegal

answer

implicit costs

question

explicit costs

answer

require an outlay of money

paying wages to workers

question

implicit costs

answer

do not require an outlay of money

opportunity costs of the owner's time

question

total cost

answer

explicit + implicit

question

accounting profit

answer

total revenue - total explicit costs

question

economic profit

answer

total revenue - total costs

question

fixed inputs

answer

where the quantity cannot be changed in the short run

question

variable input

answer

...

question

marginal product of labor

answer

The slope of the production function measures the change in output for each additional unit of labor input

change in quantity of pizza output when an additional worker is hired

question

T/F: The shape of the production function reflects the law of diminishing marginal returns.

answer

true

question

the costs of something is

answer

what you give up to get it

question

what is the explicit cost is you borrow 100,000 with a 5% interest rate?

answer

5000 interest on loan

question

what is the explicit cost what you borrow 60,000 with 5% interest rate?

answer

3000 interest on loan

question

what is the implicit cost what you use 40,000 of savings with a 5% interest rate?

answer

2000 foregone interest you could have earned on your 40,000

question

Accounting profit IGNORES _______, so it is _______ than ________

answer

implicit,

higher,

economic profit

question

answer

Explicit costs increase $500/month.

Accounting profit & economic profit each fall $500/month.

question

The equilibrium rent on office space has just increased by $500/month.

Determine the effects on accounting profit and economic profit if: YOU OWN YOUR OWN OFFICE SPACE

answer

Explicit costs do not change, so accounting profit does not change.

Implicit costs increase $500/month (opp. cost of using your space instead of renting it) so economic profit falls by $500/month.

question

production function is the relationship between

answer

quantity of inputs used to make a good and the quantity of that good

question

production function

answer

gets flatter as production rises

question

marginal product

answer

- increase in output that arises from an addition unit of input

- other inputs constant

- slope of the production function

question

marginal product of labor, MPL

answer

if you hire one more worker,

output rises by the marginal product of labor

question

diminishing marginal product

answer

- MP of an input declines as the quantity of the input increase

- production functions gets flatter as more inputs are being used

- the slope decreases

question

why is MPL important if you hire an extra worker

answer

- costs rise by the wage you pay the worker

- output rises by MPL

- comparing them helps decide if you should hire an extra worker

question

Farmer Jack's output rises by a smaller and smaller amount for each additional worker. Why?

answer

- As Jack adds workers, the average worker has less land to work with and will be less productive.

- MPL diminishes as L rises whether the fixed input is land or capital (equipment, machines, etc.).

question

marginal cost

answer

- increase in total cost arising from an extra unit of production

- change in TC/ change in quantity

question

fixed costs

answer

do not vary with quantity of output produced

cost of equipment, loans, rent

question

variable costs

answer

vary with the quantity of output produced

wages paid, cost of materials

question

when MC < ATC

answer

ATC is falling

question

when MC > ATC

answer

ATC is rising

question

MC crosses ATC at

answer

ATC curve's minimum

question

short run

answer

some inputs are fixed

question

long run

answer

all inputs are variable

question

economies of scale

answer

ATC falls as Q rises, average total cost declines as output increases

question

constant returns to scale

answer

ATC stays the same as Q increases

question

diseconomies of scale

answer

ATC rises as Q increases, average total cost rises as output rises

question

average total cost

answer

total costs/quantity

question

answer

50, 10

question

Diminishing marginal product explains why, as a firm's output increases,

answer

the production function gets flatter, while the total cost curve gets steeper.

question

A firm is producing 1,000 units at a total cost of $5,000.
If it were to increase production to 1,001 units, its total cost would rise to $5,008.

What does this information tell you about the firm?

answer

Marginal cost is $8, and average total cost is $5.

question

A firm is producing 20 units with an average total cost of $25 and marginal cost of $15.

If the firm were to increase production to 21 units, which of the following must occur?

answer

ATC would decrease

question

The government imposes a $1,000 per year license fee on all pizza restaurants.

Which cost curves shift as a result?

answer

Average total cost and average fixed cost.

question

If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost.

answer

economies, falling

question

What you give up for taking some action is called the

answer

opportunity cost

question

_____ is falling when marginal cost is below it and rising when marginal cost is above it.

answer

ATC

question

A cost that does not depend on the quantity produced is a(n)

answer

fixed costs

question

In the ice-cream industry in the short run, _______ includes the cost of cream and sugar but not the cost of the factory.

answer

variable cost

question

Profits equal total revenue minus

answer

total cost

question

The cost of producing an extra unit of output is the

answer

marginal cost

question

answer

What must be given up to acquire it

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