10: Output & Costs

Question 1

What is any firm’s main goal?

Answer 1

Maximize profit

Question 2

What is the difference between accounting profit and economic profit?

Answer 2

Accounting profit = Total Revenue - Total cost

Economic profit = Total Revenue - Opportunity Cost

Question 3

What does the opportunity cost an economist care about consist of?

Answer 3

• Cost of resources (the only cost accountants care about)
• Cost of resources owned by firm (they could’ve produced something else instead)
• Cost of resourced owned by owner (they could’ve worked for something or someone else)

Question 4

Technology efficiency vs Economic efficiency

Answer 4

TE: Least amount input to produce a given quantity of output
EE: Lease cost to product a given quanity of output.
TE is concerned about the quantity of inputs whereas EE is concerned about the cost of the inputs used.

Question 5

Describe short run (how do you increase output during it)

Answer 5

One or more resources used during SR production is fixed. (i.e., usually firm’s factory)
Other resources (labor, materials, etc.) can be changed.
Decisions made in the short run are easily reversed.
(Increase amount of labor employed)

Question 6

Describe long run

Answer 6

All materials used during LR production can be varied. (Even factory size, location)
Not easily reversed

Question 7

Sunk Cost

Answer 7

Cost incurred by the firm that cannot be changed. i.e., if a firm bought a factory and has no resale value

Question 8

What are the three components to a product schedule?

Answer 8

Total product: Total output in a given period
Marginal product: Increase in total product from one unit increase of labor
Average product: Total product / labor employed

Question 9

Short run costs: Total cost

Answer 9

All resources used
Total fixed cost: Cost of firm’s fixed inputs, doesn’t change with output
Total variable cost: Cost of firm’s variable inputs, do change with output
TC = TFC + TVC

Question 10

Short run costs: Marginal costs

Answer 10

Increase in total cost from one unit increase in total product

Question 11

Short run costs: Average costs

Answer 11

Average fixed cost: Total fixed cost per unit of output
Average variable cost: Total variable cost per unit of output
Average total cost: Total cost per unit of output
ATC = AFC + AVC

Question 12

Graph description: AFC & AVC

Answer 12

AFC: Falls as output increases
AVC: U-shaped, AVC falls to a minimum then starts to increase. AVC intersects with MC at its minimum.

Question 13

Graph description: ATC & MC

Answer 13

ATC: U-shaped

Same as AVC, above MC when ATC is falling and below MC when it is rising. At its minimum, MC equals ATC.

Question 14

Why are AVC and ATC U-shaped?

Answer 14

Initially, MC is lower than ATC and AVC, pulling it down, when MC rises higher than the graphs past their minimal points the graph goes back up.
MC has a U-shape because MP starts and rises (workers specialize) but then begin to fall (fixed input and space for the workers)

Question 15

Relationship between Average & Marginal Product and Cost

Answer 15

MC is at its minimum when MP is at its maximum (workers are most efficient, all specializing in production)
MP rises, MC falls
AVC min = AP max