Chapter 9 & 10 economics – Flashcards
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Explicit costs are payments the firm makes for:
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inputs such as wages and salaries to its employees, whereas implicit costs are non-expenditure costs that occur through the use of self-owned resources such as foregone income.
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The explicit costs of going to college include:
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tuition costs and the cost of books, whereas the implicit costs include foregone income.
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Which of the following statements is true? A) Accounting profit equals sales revenue minus explicit costs. B) Normal profit equals sales revenue minus implicit costs. C) Economic profit equals the opportunity cost. D) Accounting profit gives a true measure of the opportunity cost of the current business venture.
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A) Accounting profit equals sales revenue minus explicit costs.
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A normal profit is considered a cost because:
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this is the amount required to ensure continued supply of the product.
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What is the total product?
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this is the amount required to ensure continued supply of the product.
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Average Product
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This is the amount required to ensure continued supply of the product. *Find this by dividing the Total Product / Labor units.
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Marginal Product
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The extra output or added product associated with adding a unit of a variable resource, in this case labor, to the production process *Find this by dividiing the change in total product/ change in labor input
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Fixed cost
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Any cost that in total does not change when the firm changes its output.
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Average product in a graph:
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Raises when its less than the marginal product.
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Marginal Product in a graph is zero when:
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the slope of the total-product curve in graph (a) is zero.
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Which of the following statements is true regarding the costs associated with owning and operating an automobile?
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Fixed costs include insurance and variable costs include gasoline.
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You are considering whether to drive your car or fly 1,000 miles to Florida for spring break. In making your decision you should consider:
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the variable cost of the trip, the opportunity cost of time, and the need for transportation in Florida.
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Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Linda's accounting profit is _____________ while her economic profit is ______________.
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$300; negative $100
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True or false. The U shape of the long-run ATC curve is the result of diminishing returns.
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false
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involves a very large number of firms producing a standardized product (that is, a product like cotton, for which each producer's output is virtually identical to that of every other producer.) New firms can enter or exit the industry very easily.
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pure competition
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is a market structure in which one firm is the sole seller of a product or service (for example, a local electric utility).
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Pure monopoly
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involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output.
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oligopoly
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We study pure competition because it:
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produces ideal results in terms of low-cost production and allocative efficiency, and can be used as a basis of comparison.
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"Even if a firm is losing money, it may be better to stay in business in the short run." This statement is
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true if the loss is less than the fixed cost.
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Consider a firm that has no fixed costs and which is currently losing money. Are there any situations in which it would want to stay open for business in the short run?
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No, the firm will want to shut down.
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A firm with no fixed cost
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is really in the long run.
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The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true the:
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last unit produced adds more to revenue than to costs, and its production must necessarily increase profits or reduce losses.
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When an industry is purely competitive, price can be substituted for marginal revenue in the MR = MC rule because
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the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so the MR is constant and equal to the price.
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If a firm's current revenues are less than its current variable costs, it should shut down?
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immediately
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If a firm's current revenues are less than its current variable costs and it decides to shut down, this decision
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may be temporary until the price of the product increases.
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Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:
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A horizontal line at 2 cents per paper clip.
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A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:
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TR exceeds TC by as much as possible.
