D Calc and Interp total, average, marginal, fixed, and variable costs

Question 1

Total Cost

Answer 1

The sum of ‘all costs’ (Fixed, Variable, Explicit, Implicit) of producing a specific level of output.

Determine total cost before calculating MC

TC = TFC+TVC

Question 2

Total Cost

Answer 2

The sum of ‘all costs’ (Fixed, Variable, Explicit, Implicit) of producing a specific level of output.

Determine total cost before calculating MC

TC = TFC+TVC

Question 3

Total Fixed Cost

Answer 3

The cost of inputs that do not vary w/ the quantity of output

Ex’s: PPE, Normal Profit, fixed int. costs on debt financing, wages of management and finance employees who are not directly involved in the production of the firms product

AKA ‘Quasi-fixed’ costs because they MUST BE PAID even when Demand declines, so they result in significant losses during recession or aggressive economic competition.

Question 4

Total Variable Cost

Answer 4

The cost of all inputs that vary with output over the period of analysis.

Ex: Largest VC’s; Wages, Raw materials

VC’s move with production; output; demand

Question 5

Which relationship explains the relationship between output and cost?

Answer 5

The relationship between output and cost can be explained via

Total Cost

Marginal Cost

Average Cost

Question 6

Average Fixed Cost

Answer 6

AFC = Total Fixed Costs / Total Product

Question 7

Marginal Cost

Answer 7

%chng TC / %chng Q;output;production

Question 8

Average Variable Costs

Answer 8

AVC = TVC / Total Product

Question 9

TC and TVC exhibit first decreasing, then increasing marginal cost per unit

Answer 9

MC first decreases (as MP of a factor input increases) and then MC increases (after we reach the point of DMP)

Question 10

Important relationships among MC and AVC

Answer 10

AFC slopes downward;fixed costs are constant over Q

Vertical distance between ATC and AVC = AFC

MC declines initially, then increases; low output Q’s; efficiencies are realized; from specialization of labor. However, at some point DMR increases

MC intersects AVC and ATC at their minimum points (from below; ATC or AVC are decreasing; when MC exceeds ATC or AVC, ATC and AVC are increasing

MC curve is ‘J’ shaped;declining MC over lower production Q’s and because min. points of the ATC and AVC curves are not the same.

ATC and AVC are U-shaped, though AFC is simply concave, it’s pulled upward in ATC, where costs decrease through increase in output until DMR is realized

Min points on ATC; lowest cost per unit; max profit per UNIT, but NOT PROFIT MAX POINT

MC curve above AVC; firms short-run supply in perfectly competitive market

Question 11

Total Variable Cost

Answer 11

The cost of all inputs that vary with output over the period of analysis.

Ex: Largest VC’s; Wages, Raw materials

VC’s move with production; output; demand

Question 12

Which relationship explains the relationship between output and cost?

Answer 12

The relationship between output and cost can be explained via

Total Cost

Marginal Cost

Average Cost

Question 13

Average Fixed Cost

Answer 13

AFC = Total Fixed Costs / Total Product

Question 14

Marginal Cost

Answer 14

%chng TC / %chng Q;output;production

Question 15

Average Total Costs

Answer 15

ATC = TC / Total Product

Question 16

Average Variable Costs

Answer 16

AVC = TVC / Total Product

Question 17

TC and TVC exhibit first decreasing, then increasing marginal cost per unit

Answer 17

MC first decreases (as MP of a factor input increases) and then MC increases (after we reach the point of DMP)

Question 18

Important relationships among MC and AVC

Answer 18

AFC slopes downward;fixed costs are constant over Q

Vertical distance between ATC and AVC = AFC

MC declines initially, then increases; low output Q’s; efficiencies are realized; from specialization of labor. However, at some point DMR increases

MC intersects AVC and ATC at their minimum points (from below; ATC or AVC are decreasing; when MC exceeds ATC or AVC, ATC and AVC are increasing

MC curve is ‘J’ shaped;declining MC over lower production Q’s and because min. points of the ATC and AVC curves are not the same.

Question 19

Important relationships among MC and AVC

Answer 19

AFC slopes downward;fixed costs are constant over Q

Vertical distance between ATC and AVC = AFC

MC declines initially, then increases; low output Q’s; efficiencies are realized; from specialization of labor. However, at some point DMR increases

MC intersects AVC and ATC at their minimum points (from below; ATC or AVC are decreasing; when MC exceeds ATC or AVC, ATC and AVC are increasing

MC curve is ‘J’ shaped;declining MC over lower production Q’s and because min. points of the ATC and AVC curves are not the same.

Question 20

The relationship between product curves and cost curves illustrates an important link between a firms product curves (technology) and cost curves (production)

Answer 20

0 —> L1, MP and AP increase and AP reached max at L1, and 0—> Q1, MC and AVC decrease and MC is reached at Q1

L1—L2;labor increases;Output increases

MP decreases, AP increases to max L2. MC increases to meet AVC that decreases to Q2 where it begins to rise.

L2 and Q2 beyond: AP declines, MP declines; MC increases, AVC increases

Question 21

A firm realizes that it is producing more than the profit maximizing level of output and makes a short-run decision to decrease its output. Which of the firm’s cost measures is least likely to decrease as a result?** (REMEMBER COSTS ARE AVG. FIXED, AVG VAR, MARGINAL)

Answer 21

A firm realizes that it is producing more than the profit maximizing level of output and makes a short-run decision to decrease its output. Which of the firm’s cost measures is least likely to decrease as a result?

A short-run decrease in output will cause a firm’s average fixed costs to increase because its fixed costs are spread over a smaller number of units. In terms of cost curves, average fixed cost never slopes upward, so a decrease in output never reduces average fixed costs. The average variable cost, average total cost, and marginal cost curves all have upward sloping components along which a lower level of output would result in a lower cost.