Theory of the Firm

Question 1

long-run average total cost graph and explanation

Answer 1

Question 2

What are the five different types of economies of scale?

Answer 2

• managerial
• commerical
• financial
• risk-taking
• technical

Question 3

managerial economies of scale

Answer 3

specialisation to oversee work

Question 4

commerical economies of scale

Answer 4

when buy more of a product get better price

Question 5

financial economies of scale

Answer 5

larger companies can borrow money at lower interest

Question 6

risk-taking economies of scale

Answer 6

diversity of products = lower risk

Question 7

technical economies of scale

Answer 7

larger products use less packaging

Question 8

equation for accounting profit

Answer 8

Pi = TR - TC

profit = total revenue - total cost

Question 9

normal profit

Answer 9

• return you could make from opportunity costs of investing money
• next best paying alternative return on money
• amount of profit a business person must recieve to stay in market in long run

Question 10

economic profit

Answer 10

profit above level of normal profit

Question 11

if accounting proft < normal profit

Answer 11

lose money

Question 12

Graph for average fixed cost, average variable cost, average total cost, marginal cost and explanation

Answer 12

Question 13

diminishing marginal returns

Answer 13

in system with fixed and variable inputs each additional unit of variable input yields less and less output

firm’s short run marginal cost curve will eventually increase

Question 14

law of increasing costs

Answer 14

producing one more unit of output costs more and more variable units

Question 15

Graph for average physical product and marginal physical product and explanation

Answer 15

initially specialization overcomes DMR then DMR takes over

when MPP above APP, APP goes up

when MPP below APP, APP goes down

Question 16

in short run, profit maximising output — than revenue maximising level of profit

Answer 16

less

Question 17

How do the graphs of total production and average/marginal production align?

Answer 17

• dotted line on the left indicates the point at which MP of new workers stops increases and begins o decline
• dotted line on the right indicates the point at which TP begins to decrease because MP of labor is negative

Question 18

Graph showing TP and TVC and explanation

Answer 18

reflects DMR

beyond dotted line, TP increases at decreasing rate and TVC increases at an increasing rate because each worker adds less to firm’s output

Question 19

Diseconomies of scale factors

Answer 19

Communication inefficiencies: too large so not enough communication - can lead to processes being duplicated unnecessarily

Office politics: managers in large companies focus on achieving personal goals rather than promoting best interests of firm, may employ incompetent workers to make themselves look better

Increased regulation: larger firms more likely to be regulated by government agencies, may put anti-monopoly policies in place which add to costs of production (significant legal costs)

Question 20

Graph connecting average/marginal revenue and total revenue and explanation

Answer 20

Question 21

How to profit maximise using the total revenue/total cost approach?

Answer 21

produce quantity at which difference between TR and TC is greatest

Question 22

How to profit maximise using the marginal revenue/marginal cost approach?

• Graph for perfectly competitive firm?
• Graph for imperfectly competitive firm?

Answer 22

produce up to the level of output where MR = MC

• perfectly competitive = 2 lines
• imperfectly competitive = 3 lines

Question 23

Where is profit maximisation and why?

Answer 23

MC = MR

• firm will continue to produce until marginal profit = 0
• MP = MR - MC
• where MC = MR, MP = 0

Question 24

What is the difference between a break even point and a shut down point?

Answer 24

break-even = price at which business will make all normal profit, no economic profit shut-down = price at which loss is equal if you shut down or stay open