Deck 30: Costs of Production

Question 1

Whats defention of terms:
-accounting profit

Answer 1

the total revenue received from production and sales (p * q) minus direct or explicit costs like labor, rent, and payments for machinery

Question 2

Whats defention of terms:
-average fixed cost (AFC)

Answer 2

found by dividing fixed costs by total product

Question 3

Whats defention of terms:
-average total cost (ATC)

Answer 3

found by dividing total costs by total product

Question 4

Whats defention of terms:
-average variable cost (AVC)

Question 5

Whats defention of terms:
-economic profit

Question 6

Whats defention of terms:
-fixed cost (FC)

Question 7

Whats defention of terms:
-marginal cost (MC)

Question 8

Whats defention of terms:
-negative economic profit

Question 9

Whats defention of terms:
-positive economic profit

Question 10

Whats defention of terms:
-total cost (TC)

Question 11

Whats defention of terms:
-variable cost (VC)

Question 12

Whats defention of terms:
-zero economic profit

Question 13

Whats defention of terms:
-diseconomies of scale

Question 14

Whats defention of terms:
-economies of scale

Question 15

Whats defention of terms:
-long-run average costs (LRAC)

Question 16

Whats defention of terms:
-optimal plant size

Question 17

Explain the difference between long-run and short-run costs.
-How do short-run and long-run costs differ? Why?

Question 18

Explain the difference between long-run and short-run costs.
-Sketch graphs to illustrate costs in the short run and long run.

Question 19

Explain the difference between long-run and short-run costs.
-The text lists three examples of fixed costs-fire insurance premiums, security guard services, and existing debt payments. List and discuss three additional fixed costs for a manufacturing firm.

Question 20

Define and graph fixed, variable, average, and marginal costs.
-Explain how and whether each of the following would affect short-run marginal, variable, fixed, and total costs:
a. wage rate paid to assembly-line workers increases
b. salary paid to upper management increases
c. firm is required to implement new environmental controls
d. price of oil decreases
e. demand falls, so firm cuts back on production
f. property taxes rise
g. demand increases, so firm pays workers overtime

Question 21

Define and graph fixed, variable, average, and marginal costs.
-Indicate true, false, or uncertain for the following statements, and explain why:
a. AVC = ATC in the short run.
b. AFC + AVC + MC = ATC.
c. Average fixed cost falls as production proceeds through stages I and II; it begins to rise in stage III.
d. Marginal cost intersects the minimum point of the average fixed cost.
e. ATC = AVC = AFC at Q = 0.
f. In the short run, an increase in factor prices causes the marginal cost to intersect the average total cost at a higher level of output.

Question 22

Explain the relationship between the costs of production and productivity.
Calculate and explain the significance of positive, negative, and zero economic profits.
-Explain the difference between accounting and economic profits. What is included in calculating economic profits that is not included in accounting profits?

Question 23

Explain the relationship between the costs of production and productivity.
Calculate and explain the significance of positive, negative, and zero economic profits.
-What is the difference between normal (or zero), positive, and negative economic ?profits?

Question 24

Explain the relationship between the costs of production and productivity.
Calculate and explain the significance of positive, negative, and zero economic profits.
-Would a business owner want to stay in business if the economic profit is negative? Explain why or why not.

Question 25

Explain the relationship between the costs of production and productivity.
Calculate and explain the significance of positive, negative, and zero economic profits.
-If a business owner is earning a zero or normal economic profit, what does that mean?

Question 26

Explain the relationship between the costs of production and productivity.
Calculate and explain the significance of positive, negative, and zero economic profits.
-If a business owner is earning a zero or even negative economic profit, does that mean the accounting profit is negative? Explain.

Question 27

Explain why there are no fixed costs in the long run.
-Are there any fixed inputs in the long run? Why not? What does that mean for costs in the long run?

Question 28

Define and graph long-run costs.
-Indicate true, false, or uncertain for the following statements, and explain why:
a. In the long run, advancing technology makes the optimal plant size smaller.
b. The long-run average cost envelope curve is tangent to the minimum points of the short-run average total cost curves.

Question 29

Explain the relationship between the long-run costs of production and productivity (economies and diseconomies of scale).
-What is happening to the average total costs of production when there are economies of scale? What are explanations for economies of scale?

Question 30

Explain the relationship between the long-run costs of production and productivity (economies and diseconomies of scale).
-What is happening to the average total costs of production if there are diseconomies of scale? What are explanations for diseconomies of scale?

Question 31

Describe how real-world considerations affect the analysis of costs and production decisions in the long-run.
-Suppose you fear competition from a low-cost foreign rival. Recognizing that labor costs are your largest cost of production, you decide to announce a 10 percent across-the-board wage reduction. Do you think this action would affect the productivity of labor? Why or why not?

Question 32

Which of the following would be considered a fixed cost?

A) labor costs.
B) gas and electricity costs
C) costs of raw materials.
D) cost of fire insurance.

Question 33

Which of the following would be considered a variable cost?

A) rental of office equipment.
B) gas and electricity costs
C) security guard contract.
D) cost of fire insurance.

Question 34

Sam withdrew $100,000 from an interest bearing bank account with an annual yield of 10%. He used the $100,000 to buy real estate, which he sold after one year for $110,000. According to an economist, how much was Robert's economic profit on this deal?

A) $10,000
B) $100,000
C) 0
D) $110,000

Question 35

A firm is producing 100 units of output at a total cost of $400. The firm's average variable cost is $3.50 per unit. What is the firm's total fixed cost?

A) $350
B) $50
C) $40
D) $35

Question 36

When output is 500, fixed costs equal $5,000 and variable costs equal $10,000. What will total costs be?

A) $5,000
B) $10,000
C) $15,000
D) $500

Question 37

-Using the data in Table 30a, find the total cost of producing 8 units of output.

A) $200
B) $1,500
C) $1,700
D) $212.50

Question 38

-Using the data in Table 30a, find the marginal cost of producing the 8^th unit of output.

A) $200
B) $1,500
C) $212.50
D) $275

Question 39

-Using the data in Table 30a, find the average total cost of producing 8 units of output.

A) $200
B) $1,500
C) $212.50
D) $275

Question 40

-According to the data in Table 30a, unit costs are lowest when output is

A) 1 unit
B) 4 units
C) 6 units
D) 8 units

Question 41

-Using the data in Table 30a, find the average total cost of producing 1 unit of output.

A) $200
B) $100
C) $300
D) $275

Question 42

Which of the following would be fixed costs in the long run?

A) fire insurance premiums.
B) security guard contracts.
C) loan payments.
D) there are no fixed costs in the long run.

Question 43

The optimal plant size in the long run is

A) the one with the largest capacity.
B) the one with the lowest fixed costs.
C) the one with the lowest average total costs.
D) the one with the lowest marginal costs.

Question 44

Factors that might lead to diseconomies of scale include

A) more specialization of labor and management.
B) greater access to financing.
C) quantity discounts on raw materials.
D) greater need for management control and monitoring of production.

Question 45

What two kinds of inventories do manufacturing firms keep?

A) an inventory of final products and an inventory of materials used in production.
B) a just-in-time inventory and a back-up inventory.
C) a daily inventory and an annual inventory.
D) an inventory of office supplies and an inventory of factory supplies.

Question 46

-Which of the shapes in Diagram TB 30.1a look like the long run average cost (LRAC) curve?

A) Figure a
B) Figure b
C) Figure c
D) Figure d