The Production Function
List atleast 2 examples of variable inputs
labor, ingredients, materials
Define fixed costs
A cost that must be paid even when a firm's output is 0
Define constant returns to scale
Define implicit costs
The money value of one's opportunity costs
'Income foregone'
Define marginal analysis
The cost-benefit analysis where it is determined if the revenue outweighs the costs
Define and provide an example of fixed inputs
A fixed input are inputs that cannot be changed, like tools and machines
What is the total cost?
The summation of the fixed and variable costs
What must be true about factors of production in the long run?
All factors of production are variable
Define and provide an example of explicit costs
'Out of pocket expenses'
Money spent on materials, utilities, labor, rent, capital
Marginal revenue = Marginal costs
Marginal product is the average quantity of output produced by 1 more unit of variable input
Total Produce / Labor
Define and give the equation for marginal costs
It is the additional cost of producing one more unit of output.
ΔTC/ΔQ
Define diseconomies of scale
Long run average total cost increases as output increases
What is the difference between accounting profit and economic profit?
Accounting profit includes only explicit costs while economic profit includes both explicit and implicit costs.
Why is the profit maximization rule important?
When the MR and MC lines intersect, that is the point where each individual quantity stops producing more marginal revenue than costs
Initially increases due to specialization an division of labor, then decreased sue to diminishing returns
Define and give the equation for Average Total Cost
TC/Q -OR- AFC+AVC
Describe what the long run average total cost curve looks like
Initially decreases, then increases
Somewhat resembles a smile
What is normal profit?
Total revenue covering both implicit and explicit costs.
Fill in the blank.
If MR > MC, the firm should produce _______
If MR < MC, the firm should produce _______
1. More
2. Less
State atleast 2 ways the MP Graph represents the slope of TP
When MP is increasing, TP is increasing at a positive rate
When MP is positive but decreasing, TP is increasing at a negative rate
When MP is 0, TP is at its max
When MP is negative, TP is decreasing
A bakery's costs are
$25/day for kitchen access
$10/day for each employee
$2/day for ingredients for a batch of cookies
What are the variable and fixed costs?
Variable costs: $10 & $2
Fixed costs: $25
If the inputs increase by 50% and the outputs increase by 100%, then this is an example of what king of return to scale?
Increasing returns to scale
A firm makes $120,000
They spend $90,000 in explicit costs and $30,000 in implicit costs.
What is their accounting profit?
$120,000 - $90,000 = $30,000
If the MR and MC graph intersect at point Q= 8, then what is true if a firm is producing at Q=3