# Econ Exam 2 Chapter 8

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Economic Profit
Total revenue minus economic cost
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Economic Cost
the opportunity cost of the inputs used in the production process;equal to explicit cost plus implicit cost. To compute this, we must determine what the firm sacrifices to use inputs in the production process. economic cost is opportunity cost.
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Explicit Cost
A monetary payment. This is a firms actual monetary payments for inputs. -For example: a firm spends a total of 10k per month on labor, capital, and materials, its explicit cost is \$10,000.
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Implicit cost
an opportunity cost that does not involve monetary payment -the opportunity cost of inputs that doesn't require payment -two examples of inputs who's costs are implicit rather than explicit are: ~an opportunity cost of the entrepreneurs time (if he can earn 5k per month at another job his opportunity cost of the time spend running the firm is 5k per month.) AND ~opportunity cost of the entrepreneurs funs (funds to set up and run businesses)
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Accounting cost
The explicit costs of production
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Accounting Profit
Total revenue minus accounting cost
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Marginal Product of Labor
The change in output from one additional unit of labor
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Diminishing Returns
As one input increases while the other inputs are held fixed, output increases at a decreasing rate
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Total-Product Curve
a curve showing the relationship between the quantity of labor and the quantity of output proceeded -ceteris paribus
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Fixed Cost (FC)
cost that does not vary with the quantity produced
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Variable cost (VC)
cost that varies with the quantity produced
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Short run total cost (TC)
the total cost of production when at least one input is fixed; equal to fixed cost plus variable cost.
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Average fixed cost (AFC)
fixed cost divided by the quantity produced
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average variable cost (AVC)
variable cost divided by the quantity produced
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short run average total cost (ATC)
Short run total cost divided by the quantity produced; equal to AFC plus AVC.
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Short run marginal cost (MC)
The change in short run total cost resulting from one unit increases in output
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Long Run total Cost (LTC)
the total cost of production when a firm is perfectly flexible in choosing its inputs
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Long Run average cost (LAC)
the long run cost divided by the quantity produced
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Constant Returns to scale
a situation in which the long run total cost increases proportionately with output, so average cost is constant
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Long Run marginal cost (LMC)
the change in long run cost resulting from a one unit increase in output
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Indivisible Input
an input that cannot be scaled down to produce a smaller quantity of output
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Economics of scale
a situation in which the long run average cost of production decreases as output increases
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Minimum efficient scale
the output at which scale economics are exhausted
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Diseconomies of scale
the situation in which the long run average cost of production increases as output increases
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c. Principle of diminishing marginal returns is,
when you increase units of a variable input (holding units of fixed input constant), the point where output (see total produce curve) increases but at a decreasing rate (Fig. 8.1, from the third worker and thereafter).
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d. Short run total cost (TC) is sum of total variable cost (VC) and total fixed cost (FC) (Fig. 8.2).
Average fixed cost (AFC) equals total costs (TC) divided by the quantity produced (Q); and average variable cost (AVC) equals total costs (TC) divided by Q; Fig. 8.3. Thus, average total cost (ATC), which is TC/Q, equals AVC plus AFC.
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e. Marginal cost is change in total cost from producing one more unit of output;
marginal cost intersects ATC curve at its minimum (Fig. 8.4).
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f. Short-run average cost curve is U-shaped (know why),
but shape of long-run average cost curve (LAC) depends on whether there are economies or diseconomies of scale (know why; Figs. 8.5 and 8.6). The short run is shaped because of diminishing returns and the resulting decrease in labor productivity and increase in marginal costs. if a firm increases its output while at least one input is held fixed, diminishing returns eventually occur, pulling up the average cost of production. the difference between long run and short run is a firms flexibility in choosing inputs. in long run firm can increase all of inputs, scaling up its operation by building a larger production facility and as a result not suffer.
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QUESTIONS START 1. Barbara left a \$25,000jobasanarchitecttorunacateringbusiness. She invested \$100,000 of her own money to purchase a building for the business. The interest rate that Barbara typically earns on her investments is 10 percent, while real estate is not appreciating in Barbara's neighborhood. Barbara spends \$150,000 per year on employee salaries, supplies, etc. What is the economic cost of Barbara's catering business? a. \$125,000 b. \$165,000 c. \$175,000 d. \$185,000
25k 150k 10k-10% interest rate she's loosing 185k loss D
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2. In the short-run,______ factors of production are fixed, while in the long-run, _____ of them are. a. some; none b. all; none c. no; at least some d. all; at least some
A. Some;None none were fixed because they were flexible and could adapt with long run.
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3. Which of the following is a long-run adjustment? a. a firm hires two new workers. b. the number of professional baseball teams increases by two. c. GM buys more steel for its auto plants in Michigan. d. a farmer buys twice her usual amount of fertilizer
B-increase in number of firms in the market within one firm something changing ACD
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4. Diminishing marginal returns imply that a. marginal costs are decreasing. b. marginal costs are increasing. c. marginal costs are constant. d. marginal costs may be increasing or decreasing.
B marginal revenue staying the same for every new input you're getting a decreasing rate of increase on return. GM buys more steel for its auto plants in Michigan. twice as much steel but not making twice as much cars so dividing totals by what you're making by what you're spending on production the number is going up because you have this leftover steel that keeps the marginal cost increasing. marginal returns increase at a decreasing rate ***
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5. Diminishingmarginalreturnsimplythatfirms a. require fewer and fewer workers to produce each additional unit of output. b. require more and more workers to produce each additional unit of output. c. get decreasing amounts of revenue for each unit of output they produce. d. get increasing amounts of revenue for each unit of output they produce.
B
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POST PIC 6. RefertoTable8.2whichgivesafirm'sproductionfunction.Assumethat all non-labor inputs are fixed. Diminishing returns set in with the addition of the a. third worker. b. fourth worker. c. fifth worker. d. sixth worker.
B forth worker take marginal numbers change in output divided by change in input 40/1 30/1
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7. RefertoTable8.2whichgivesafirm'sproductionfunction.Assumethat all non-labor inputs are fixed. The marginal product of the fifth worker is a. 10 units. b. 30 units. c. 25 units.
C 4-5th worker 25 units
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8. Marginalproductintheshort-run a. increases at all levels of production. b. diminishes at all levels of production. c. may initially increase, then eventually decrease. d. may initially decrease, then eventually increase.
C see that played out in table above initially increase because adding more workers makes for more wait time on using the machines (example) getting more machines would make it a long run consideration at that point
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9. Marginalcostisdefinedas a. total variable cost resulting from a one unit increase in quantity. b. quantity resulting from a one unit increase in total variable cost. c. the change in total variable cost resulting from a one unit increase in the change in quantity. d. the change in quantity resulting from a one unit increase in the change in total variable cost.
C "the change"=marginal
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10. Average variable cost is defined as a. total variable cost divided by quantity. b. quantity divided by total variable cost. c. the change in total variable cost divided by d. the change in quantity divided by the change
A total divided by quant
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11. Average fixed cost is defined as a. total variable cost divided by quantity. b. quantity divided by total variable cost. c. the change in total variable cost divided by d. total fixed cost divided by quantity.
D
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12. Average total cost is defined as a. total variable cost divided by quantity. b. quantity divided by total variable cost. c. the change in total variable cost divided by the change in quantity. d. total cost divided by quantity.
D
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13. Average variable cost equals a. total fixed cost plus total variable cost. b. average total cost minus average fixed cost. c. average total cost plus average fixed cost. d. total cost minus average cost.