Session 4: Production, costs, and profit maximization Flashcards Preview

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Flashcards in Session 4: Production, costs, and profit maximization Deck (17)
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1
Q

What is comparative advantage?

A

When a firm has a lower marginal cost for producing something than another firm

2
Q

What is absolute advantage?

A

When a firm can produce more of something than another firm

3
Q

What does lower marginal cost grant?

A

Comparative advantage

4
Q

What determines profit?

A

Average cost

5
Q

Does fixed cost vary with output?

A

No

6
Q

Does variable cost vary with output?

A

Yes

7
Q

In the very short-run, all costs are…

A

Fixed

8
Q

In the very long-run, all costs are…

A

Variable

9
Q

If MC < AC, AC is…

A

Declining

10
Q

If MC > AC, AC is…

A

Increasing

11
Q

When does MC = AC?

A

At minimum average cost

12
Q

What is the difference between fixed costs and sunk costs?

A

Fixed costs can be avoided (ie machinery)

Sunk costs are incurred and cannot be recovered (ie advertising expense)

13
Q

What is the formula for marginal cost?

A

ΔTC/ ΔQ

14
Q

What is the formula for average cost?

A

TC/Q

15
Q

If price is less than AVC, what should happen?

A

Shutdown

16
Q

As output increases, average cost likely declines because…

A

Economies of scale

Large scale allows specialization

Larger scale provides greater flexibility for optimizing results

Scale might give the firm buying power to negotiate lower prices

17
Q

Average cost likely increases because…

A

Diseconomies of scale

Larger firms are more complex and harder to manager

Diminishing returns to inputs