Chapter 12. The Costs of Produc4on

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Chapter 12. The Costs of Produc4on"

Transcription

1 Chapter 12 The Costs of Produc4on Copyright 214 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2 What will you learn in this chapter? How to define total revenue, total cost, and profit. How to differen4ate between: Fixed and variable costs. Explicit and implicit costs. How to calculate economic and accoun4ng profit. How to define marginal product and show diminishing marginal product. How to define average and marginal cost. How to think about long- run and short- run costs. How to define returns to scale and its implica4ons. 12-2

3 Revenues, costs, and profits A firm s goal is to maximize profits: Profit = Total revenue Total cost Total revenue is the amount that a firm receives from the sale of goods and services and is calculated as the quan4ty sold mul4plied by the price paid for each unit: Total revenue = Quan4ty x Price = (Q 1 xp 1 ) + (Q 2 xp 2 ) + + (Q n xp n ) Total cost is the amount that a firm pays for inputs used to produce goods or services. While total revenue is simple to calculate, costs are more complex and harder to calculate. 12-3

4 Ac9ve Learning: Calcula9ng total revenue Suppose a firm produces two goods: Bouncy balls that sell for $1. Gumball machines that sell for $25. Last year the firm sold 1, balls and 1, gumball machines. Calculate total revenue. 12-4

5 Ac9ve Learning: Calcula9ng total revenue Suppose a firm produces two goods: Bouncy balls that sell for $1. Gumball machines that sell for $25. Last year the firm sold 1, balls and 1, gumball machines. Calculate total revenue. TR = 1, x $1 + 1, x $25 =$35, 12-5

6 Fixed and variable costs A firm s total cost is defined as: Total costs = Fixed costs + Variable costs Fixed costs are costs that do not depend on the quan4ty of output produced. One- 4me, upfront payments before produc4on begins, like buying equipment. Ongoing payments, like monthly rents. Fixed costs are constant as quan4ty increases. Even if a firm produces nothing, it s4ll incurs a fixed cost. 12-6

7 Fixed and variable costs Variable costs are those that depend on the quan4ty of output produced. Includes raw materials as well as labor costs. Total variable costs increase with each addi4onal unit produced. If a firm produces nothing, variable costs are zero. 12-7

8 Fixed and variable costs This table provides the fixed and variable costs for a firm. Quan4ty of pills (millions) 1 Fixed costs ($) 1,, 1,, Variable costs ($) 1, Total costs ($) 1,, 1,1, ,, 1,, 1,, 1,, 1,, 1,, 1,, 2, 3, 4, 5, 6, 7, 8, 1,2, 1,3, 1,4, 1,5, 1,6, 1,7, 1,8, As the quan4ty produced increases, the fixed costs remain constant and the variable costs increase. 12-8

9 Ac9ve Learning: Calcula9ng costs Fill in the table assuming fixed costs are $1, and variable costs are $2 per unit. Quan4ty 1 Fixed costs ($) Variable costs ($) Total costs ($)

10 Ac9ve Learning: Calcula9ng costs Fill in the table assuming fixed costs are $1, and variable costs are $2 per unit. Quan4ty 1 Fixed costs ($) 1, 1, Variable costs ($) 2 Total costs ($) 1, 1, , 1, 1, 1, 1, 1, 1, , 1,2 1,4 1,6 1,4 1,6 1,8 2, 2,2 2,4 2,6 12-1

11 Explicit and implicit costs A firm s opportunity cost of opera4on has two components. The first is composed of the fixed and variable costs. These are explicit costs that require a firm to spend money. The second is composed of forgone opportuni4es. These are implicit costs that represent opportuni4es that could have generated revenue if the firm had invested its resources in another way. To properly account for the total costs incurred by a firm, total cost includes both types of costs

12 Economic and accoun9ng profit When companies report their profits, they provide accoun7ng profits: Accoun4ng profit = Total revenue Explicit costs Accoun4ng profits may be a misleading indicator of how well a business is really doing. To account for implicit costs, economic profit further subtracts implicit costs: Economic profit = Accoun4ng profit Implicit costs 12-12

13 Economic and accoun9ng profit The following dialog illustrates why economic profits maeer. CEO: We have the opportunity to buy a new manufacturing facility. Is this a smart move for you company? Executive A: The new facility would cost $6 million to buy and $4 million to operate over the next decade, for a total cost of $1 million. The medicines we could produce there would bring in revenue of $13 million. We could make $3 million in profits. Buy the factory! Executive B: But you re forgetting about all of the other things we could do with $1 million. By my calculations, we could earn $6 million in interest over the next 1 years of we invested the money. That means that the true cost of buying the facility is $16 million, and the revenue would be only $13 million. If we bought the factory, we could lose $3 million! 12-13

14 Total produc9on, marginal product, and average product Firms create value by bringing together different ingredients to create a good or service that consumers want. A produc7on func7on is the rela4onship between the quan4ty of inputs and the resul4ng quan4ty of outputs. The increase in output that is generated by an addi4onal unit of input is the marginal product. The principle of diminishing marginal product states that the marginal product of an input decreases as the quan4ty of the input increases. The average product is total produc4on divided by the number of workers

15 Total produc9on and marginal product This table provides the total produc4on and marginal product from each addi4onal unit of labor. Labor (# employees) Total produc4on (# pizzas) Marginal product of labor (# pizzas) The first three workers have an increasing marginal product. Aier three workers, each addi4onal worker contributes less to total produc4on, reflected by decreasing marginal product. Note that even though marginal product of labor is decreasing, total produc4on is s4ll rising

16 Ac9ve Learning: Total produc9on, marginal product, and average product Fill in the table. At what point does marginal product start to diminish? Labor (# employees) 1 2 Total produc4on 2 45 Marginal product Average product

17 Ac9ve Learning: Total produc9on, marginal product, and average product Fill in the table. At what point does marginal product start to diminish? Labor (# employees) Total produc4on Marginal product Average product

18 Produc9on func9on The produc4on func4on can be represented visually. The marginal product is the slope of the total produc4on curve. Quantity of pizzas 1, Curve flattens as diminishing marginal product kicks in. Curve gets steeper as marginal product increases. Total production When output is very low, each addi4onal worker has a higher marginal product than the previous one. As more workers are added, marginal product starts to diminish Quantity of workers 12-18

19 Average and marginal product The principle of diminishing marginal product and average product can be represented visually. This establishes the rela4onship between marginal and average product. Quantity of pizzas Eventually, marginal product starts to decrease. 1. Initially, adding more workers increases marginal product Quantity of workers Average product Marginal product When an addi4onal worker s marginal product is greater than the exis4ng average product, the average product increases. When the marginal product curve crosses the average product curve, the average product also starts to decrease. When an addi4onal worker s marginal product is less than the exis4ng average product, the average product decreases

20 Costs of produc9on When a firm increases its output by adjus4ng its use of inputs, it incurs the costs associated with that decision. The rela4onships between output and costs are: Average fixed cost (AFC) = Fixed cost/quantity Average variable cost (AVC) = Variable cost/quantity Average total cost (ATC) = Total costs/quantity = AFC + AVC Marginal cost (MC) = Δ total cost/δ quantity 12-2

21 Costs of produc9on The table below provides the produc4on and costs of a pizza joint that requires a lease for $3 and wages for workers at $2 each. Labor (# workers) Total produc4on (# pizzas) Fixed costs ($) Average fixed costs ($/pizza) Variable costs ($) Average variable costs ($/ pizza) Total costs ($) Average total costs ($/pizza) Marginal product (# pizzas) 3 3 Marginal cost ($/ pizza) , , , , , , , ,6 2. 1, , , , ,

22 Cost curves Cost func4ons can be represented visually. Cost ($) 2,5 2, 1,5 1, 5 TC , Quantity of pizzas VC Because of diminishing marginal product, variable costs increase more as each additional pizza is added. Fixed costs, on the other hand, stay the same regardless of how many pizzas are produced. The total cost curve is the sum of variable and fixed costs. FC The VC curve ini4ally becomes less steep, reflec4ng the increasing marginal product of the first few employees. As the principle of diminishing marginal product kicks in, the variable cost curve gets gradually steeper. Adding FC and VC yields TC

23 Cost curves Average costs can be represented visually. Cost/pizza ($) ATC AVC AFC , Quantity of pizzas AFC trends downward. Same cost spread out over more units of output. AVC is U- shaped. First decreases and then increases, reflec4ng the marginal product of inputs. ATC curve is U- shaped. Decreases in AFC and increases with AVC

24 Cost curves Marginal cost can be represented visually. Cost / pizza ($) MC , Quantity of pizzas The MC curve is U- shaped and is the inverse shape of the marginal product curve. Every addi4onal unit of input costs the same, regardless of its contribu4on to produc4on. As marginal product of labor ini4ally increases, MC decreases. As marginal product diminishes, the MC increases

25 Marginal and average cost curves The rela4onship between marginal and average total cost can be established visually. Cost/pizza ($) MC ATC 5 1, Quantity of pizzas When the MC of producing another unit is less than the ATC, producing an extra unit decreases the ATC. When the marginal cost of producing another unit is more than the average total cost, producing an extra unit will increase the ATC. The MC curve intersects the ATC curve at its lowest point

26 Summarizing costs The following summarizes various costs. Cost Total cost (TC) Fixed cost (FC) Variable cost (VC) Descrip4on The amount that a firm pays for all of the inputs (fixed and variable) that go into producing goods and services Calcula4on TC = FC + VC Costs that don t depend on the quan4ty of output produced Costs that depend on the quan4ty of output produced Explicit cost Costs that require a firm to spend money Implicit cost Costs that represent forgone opportuni4es Average fixed costs Fixed costs divided by the quan4ty of output AFC = FC / Q (AFC) Average variable costs (AVC) Variable costs divided by the quan4ty of output AVC = VC / Q Average total costs (ATC) Total costs divided by the quan4ty of output ATC = TC / Q Marginal cost (MC) The addi4onal cost incurred by a firm when it produces one addi4onal unit of output MC = DTC / DQ 12-26

27 Ac9ve Learning: Costs Fill in the table, assuming that a lease for a building is $3 and workers wages are $1 each. Labor (# workers) Total produc4on (# pizzas) 165 Fixed costs ($) Average fixed costs ($/pizza) Variable costs ($) Average variable costs ($/ pizza) Total costs ($) Average total costs ($/pizza) Marginal cost ($/pizza) 12-27

28 Ac9ve Learning: Costs Fill in the table, assuming that a lease for a building is $3 and workers wages are $1 each. Labor (# workers) Total produc4on (# pizzas) Fixed costs ($) Average fixed costs ($/pizza) Variable costs ($) Average variable costs ($/ pizza) Total costs ($) , , , , , AFC declines as output increases. AVC declines and then rises as output increases. MC declines and then rises as output increases. Average total costs ($/pizza) Marginal cost ($/pizza) 12-28

29 Costs in the long run Costs that are fixed may be adjusted in the long- run. For example, factory sizes can be adjusted to increase or decrease capacity. In the short- run, fixed inputs can not be adjusted. The long- run is the 4me required for a firm to vary all of its costs, if so desired. The long- run depends on firm and produc4on types. The cost curves considered so far are short- run cost curves. When a firm adjusts one of its long- run costs, the en4re fixed cost curve shiis, as it is more efficient and can produce higher output

30 Returns to scale The rela4onship between costs and output is based on the scale of produc4on. The planet size or scale of produc4on to produce a certain amount of output. If increasing the scale of produc4on to obtain higher output lowers the minimum of the average total cost, then economies of scale occur. If increasing the scale of produc4on to obtain higher output raises the minimum of the average total cost, then diseconomies of scale occur. Constant returns to scale occur when the minimum of the average total cost does not depend on the quan4ty of output. When the average total cost is at its minimum, an efficient scale is achieved. 12-3

31 Ac9ve Learning: Economies and diseconomies of scale Match each segment of the long- run ATC with its respec4ve scale or produc4on (economies, constant, and diseconomies). Average total cost Long-run ATC Output 12-31

32 Ac9ve Learning: Economies and diseconomies of scale Match each segment of the long- run ATC with its respec4ve scale or produc4on (economies, constant, and diseconomies). Average total cost When cost per unit goes down as output increases, there are economies of scale. When cost per unit increases as output increases, there are diseconomies of scale. Long-run ATC When cost stays constant as output increases, there are constant returns to scale. Economies of scale Constant returns to scale Diseconomies of scale Output 12-32

33 Long- run ATC The long- run ATC curve is constructed by combining all possible short- run ATC curves. Short- run ATC curves are iden4fied by changing the scale of produc4on. Average total cost Smaller firms Short-run ATCs faced by firms of varying sizes Larger firms Long-run ATC Short- run ATC curves cover a smaller range of output. By increasing or decreasing scale of produc4on, firms can move along the long- run ATC curve from one short- run ATC curve to another. Output 12-33

34 Summary The pursuit of profits drives every firm s decision- making process, including how much to produce and whether to stay in business. Profit is the difference between cost and revenues. This chapter inves4gates the rela4onships between inputs, outputs, and costs by studying a firm s profitability

35 Summary Fixed costs are those that don t depend on the quan4ty of output produced. Variable costs are those that do depend on the quan4ty of output produced. Costs include both implicit and explicit costs. Firms are able to adjust scale of produc4on over 4me. Thus, some costs are fixed in the short run, but become variable in the long run. A firm s long- run cost curve reflects the increased flexibility of fixed costs

Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review

Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review 1. Implicit costs are: A) equal to total fixed costs. B) comprised entirely of variable costs. C) "payments" for self-employed

More information

Technology, Production, and Costs

Technology, Production, and Costs Chapter 10 Technology, Production, and Costs 10.1 Technology: An Economic Definition 10.1 LEARNING OBJECTIVE Learning Objective 1 Define technology and give examples of technological change. A firm s technology

More information

a. What is the total revenue Joe can earn in a year? b. What are the explicit costs Joe incurs while producing ten boats?

a. What is the total revenue Joe can earn in a year? b. What are the explicit costs Joe incurs while producing ten boats? Chapter 13 1. Joe runs a small boat factory. He can make ten boats per year and sell them for 25,000 each. It costs Joe 150,000 for the raw materials (fibreglass, wood, paint, and so on) to build the ten

More information

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 12 - Behind the Supply Curve - Inputs and Costs Fall 2010 Herriges (ISU) Ch. 12 Behind the Supply Curve Fall 2010 1 / 30 Outline 1 The Production Function

More information

N. Gregory Mankiw Principles of Economics. Chapter 13. THE COSTS OF PRODUCTION

N. Gregory Mankiw Principles of Economics. Chapter 13. THE COSTS OF PRODUCTION N. Gregory Mankiw Principles of Economics Chapter 13. THE COSTS OF PRODUCTION Solutions to Problems and Applications 1. a. opportunity cost; b. average total cost; c. fixed cost; d. variable cost; e. total

More information

Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions.

Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions. Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions. Reference: Gregory Mankiw s Principles of Microeconomics, 2 nd edition, Chapter 13. Long-Run

More information

Economics 10: Problem Set 3 (With Answers)

Economics 10: Problem Set 3 (With Answers) Economics 1: Problem Set 3 (With Answers) 1. Assume you own a bookstore that has the following cost and revenue information for last year: - gross revenue from sales $1, - cost of inventory 4, - wages

More information

OVERVIEW. 5. The marginal cost is hook shaped. The shape is due to the law of diminishing returns.

OVERVIEW. 5. The marginal cost is hook shaped. The shape is due to the law of diminishing returns. 9 COST OVERVIEW 1. Total fixed cost is the cost which does not vary with output. Total variable cost changes as output changes. Total cost is the sum of total fixed cost and total variable cost. 2. Explicit

More information

The Cost of Production

The Cost of Production The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The

More information

Pre-Test Chapter 20 ed17

Pre-Test Chapter 20 ed17 Pre-Test Chapter 20 ed17 Multiple Choice Questions 1. In the above diagram it is assumed that: A. some costs are fixed and other costs are variable. B. all costs are variable. C. the law of diminishing

More information

Review of Production and Cost Concepts

Review of Production and Cost Concepts Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #3 Review of Production and Cost Concepts Thursday - September 23, 2004 OUTLINE OF TODAY S RECITATION 1.

More information

SHORT-RUN PRODUCTION

SHORT-RUN PRODUCTION TRUE OR FALSE STATEMENTS SHORT-RUN PRODUCTION 1. According to the law of diminishing returns, additional units of the labour input increase the total output at a constantly slower rate. 2. In the short-run

More information

chapter Behind the Supply Curve: >> Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost

chapter Behind the Supply Curve: >> Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost chapter 8 Behind the Supply Curve: >> Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost We ve just seen how to derive a firm s total cost curve from its production function.

More information

PART A: For each worker, determine that worker's marginal product of labor.

PART A: For each worker, determine that worker's marginal product of labor. ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

More information

COST THEORY. I What costs matter? A Opportunity Costs

COST THEORY. I What costs matter? A Opportunity Costs COST THEORY Cost theory is related to production theory, they are often used together. However, the question is how much to produce, as opposed to which inputs to use. That is, assume that we use production

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run? Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm

More information

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to:

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Learning Objectives After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Discuss three characteristics of perfectly competitive

More information

Production and Cost Analysis

Production and Cost Analysis Production and Cost Analysis The entire production process begins with the supply of factors of production or inputs used towards the production of a final good we all consume in the final good market.

More information

Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015

Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015 Name: Solutions Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015 Spring 2015 Prof. Dowell Instructions: Write the answers clearly and concisely on these sheets

More information

Price Theory Lecture 4: Production & Cost

Price Theory Lecture 4: Production & Cost Price Theory Lecture 4: Production & Cost Now that we ve explained the demand side of the market, our goal is to develop a greater understanding of the supply side. Ultimately, we want to use a theory

More information

, to its new position, ATC 2

, to its new position, ATC 2 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-171 Behind the Supply Curve: Inputs and Costs chapter: 12 1. Changes in the prices of key commodities can have a significant impact on a company s

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest

More information

Lecture 8 Practice. Multiple Choice Identify the choice that best completes the statement or answers the question.

Lecture 8 Practice. Multiple Choice Identify the choice that best completes the statement or answers the question. Lecture 8 Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which field of economics studies how the number of firms affects the prices in a market

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640, Survey of Microeconomics, Quiz #4 Fall 2006 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the short run, A) there are no variable

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

More information

CHAPTER 8 COSTS OF PRODUCTION

CHAPTER 8 COSTS OF PRODUCTION CHAPTER 8 COSTS OF PRODUCTION Chapter in a Nutshell This chapter gives an in-depth look at the costs of production for firms, both in the short run and in the long run. Although production techniques may

More information

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs:

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: Economic Cost: the monetary value of all inputs used in a particular activity or enterprise over a given period.

More information

Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

More information

Unit 2.3 - Theory of the Firm Unit Overview

Unit 2.3 - Theory of the Firm Unit Overview Unit 2.3.1 - Introduction to Market Structures and Cost Theory Intro to Market Structures Pure competition Monopolistic competition Oligopoly Monopoly Cost theory Types of costs: fixed costs, variable

More information

11 PERFECT COMPETITION. Chapter. Competition

11 PERFECT COMPETITION. Chapter. Competition Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

More information

Chapter 6 Competitive Markets

Chapter 6 Competitive Markets Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

More information

Chapter 7: The Costs of Production QUESTIONS FOR REVIEW

Chapter 7: The Costs of Production QUESTIONS FOR REVIEW HW #7: Solutions QUESTIONS FOR REVIEW 8. Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing?

More information

Chapter 12 Production and Cost

Chapter 12 Production and Cost Chapter 12 Production and Cost 12.1 Economic Cost and Profit 1) The primary goal of a business firm is to A) promote fairness. B) make a quality product. C) promote workforce job satisfaction. D) maximize

More information

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 9 Chapter 6 WRITE [4] Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his

More information

Practice Questions Week 6 Day 1

Practice Questions Week 6 Day 1 Practice Questions Week 6 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Economists assume that the goal of the firm is to a. maximize total revenue

More information

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 15, 2007. Lecture 13. Cost Function

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 15, 2007. Lecture 13. Cost Function Short-Run Cost Function. Principles of Microeconomics, Fall Chia-Hui Chen October, ecture Cost Functions Outline. Chap : Short-Run Cost Function. Chap : ong-run Cost Function Cost Function et w be the

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Practice for Perfect Competition Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a defining characteristic of a

More information

CE2451 Engineering Economics & Cost Analysis. Objectives of this course

CE2451 Engineering Economics & Cost Analysis. Objectives of this course CE2451 Engineering Economics & Cost Analysis Dr. M. Selvakumar Associate Professor Department of Civil Engineering Sri Venkateswara College of Engineering Objectives of this course The main objective of

More information

Chapter. Perfect Competition CHAPTER IN PERSPECTIVE

Chapter. Perfect Competition CHAPTER IN PERSPECTIVE Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics, Quiz #5 Fall 2007 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) Perfect competition

More information

Cost OVERVIEW. WSG6 7/7/03 4:36 PM Page 79. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

Cost OVERVIEW. WSG6 7/7/03 4:36 PM Page 79. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved. WSG6 7/7/03 4:36 PM Page 79 6 Cost OVERVIEW The previous chapter reviewed the theoretical implications of the technological process whereby factors of production are efficiently transformed into goods

More information

Chapter 5 The Production Process and Costs

Chapter 5 The Production Process and Costs Managerial Economics & Business Strategy Chapter 5 The Production Process and Costs McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Production Analysis

More information

We will study the extreme case of perfect competition, where firms are price takers.

We will study the extreme case of perfect competition, where firms are price takers. Perfectly Competitive Markets A firm s decision about how much to produce or what price to charge depends on how competitive the market structure is. If the Cincinnati Bengals raise their ticket prices

More information

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

More information

Chapter 8. Competitive Firms and Markets

Chapter 8. Competitive Firms and Markets Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,

More information

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

More information

Lab 12: Perfectly Competitive Market

Lab 12: Perfectly Competitive Market Lab 12: Perfectly Competitive Market 1. Perfectly competitive market 1) three conditions that make a market perfectly competitive: a. many buyers and sellers, all of whom are small relative to market b.

More information

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY TEACHING NOTES This chapter begins by explaining what we mean by a competitive market and why it makes sense to assume that firms try to maximize profit.

More information

CHAPTER 9: PURE COMPETITION

CHAPTER 9: PURE COMPETITION CHAPTER 9: PURE COMPETITION Introduction In Chapters 9-11, we reach the heart of microeconomics, the concepts which comprise more than a quarter of the AP microeconomics exam. With a fuller understanding

More information

Review 3. Table 14-2. The following table presents cost and revenue information for Soper s Port Vineyard.

Review 3. Table 14-2. The following table presents cost and revenue information for Soper s Port Vineyard. Review 3 Chapters 10, 11, 12, 13, 14 are included in Midterm 3. There will be 40-45 questions. Most of the questions will be definitional, make sure you read the text carefully. Table 14-2 The following

More information

COST & BREAKEVEN ANALYSIS

COST & BREAKEVEN ANALYSIS COST & BREAKEVEN ANALYSIS http://www.tutorialspoint.com/managerial_economics/cost_and_breakeven_analysis.htm Copyright tutorialspoint.com In managerial economics another area which is of great importance

More information

N. Gregory Mankiw Principles of Economics. Chapter 14. FIRMS IN COMPETITIVE MARKETS

N. Gregory Mankiw Principles of Economics. Chapter 14. FIRMS IN COMPETITIVE MARKETS N. Gregory Mankiw Principles of Economics Chapter 14. FIRMS IN COMPETITIVE MARKETS Solutions to Problems and Applications 1. A competitive market is one in which: (1) there are many buyers and many sellers

More information

Price Theory Lecture 6: Market Structure Perfect Competition

Price Theory Lecture 6: Market Structure Perfect Competition Price Theory Lecture 6: Market tructure Perfect Competition I. Concepts of Competition Whether a firm can be regarded as competitive depends on several factors, the most important of which are: The number

More information

Market Structure: Perfect Competition and Monopoly

Market Structure: Perfect Competition and Monopoly WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

More information

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output.

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output. Ch. 9 1. Which of the following is not an assumption of a perfectly competitive market? A) Fragmented industry B) Differentiated product C) Perfect information D) Equal access to resources 2. Which of

More information

Fixed Cost. Marginal Cost. Fixed Cost. Marginal Cost

Fixed Cost. Marginal Cost. Fixed Cost. Marginal Cost 1. Complete the following table (round each answer to the nearest whole number): Output Total Variable Fixed Marginal Average Avg. Var. Avg. Fixed 0 30 1 35 60 3 110 4 00 5 30 6 600 Output Total Variable

More information

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC. 1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Multiple choice review questions for Midterm 2 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A consumption point inside the budget line A) is

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between

More information

Econ 202 Exam 3 Practice Problems

Econ 202 Exam 3 Practice Problems Econ 202 Exam 3 Practice Problems Principles of Microeconomics Dr. Phillip Miller Multiple Choice Identify the choice that best completes the statement or answers the question. Chapter 13 Production and

More information

Demand, Supply, and Market Equilibrium

Demand, Supply, and Market Equilibrium 3 Demand, Supply, and Market Equilibrium The price of vanilla is bouncing. A kilogram (2.2 pounds) of vanilla beans sold for $50 in 2000, but by 2003 the price had risen to $500 per kilogram. The price

More information

Cost of Production : An Example

Cost of Production : An Example University of California, Berkeley Spring 008 ECON 00A Section 0, Cost of Production : An Example What you should get out of this example: Understand the technical derivation of optimal inputs in Cost

More information

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!!

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications

More information

Profit Maximization. 2. product homogeneity

Profit Maximization. 2. product homogeneity Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out

More information

Where are we? To do today: finish the derivation of the demand curve using indifference curves. Go on then to chapter Production and Cost

Where are we? To do today: finish the derivation of the demand curve using indifference curves. Go on then to chapter Production and Cost Where are we? To do today: finish the derivation of the demand curve using indifference curves Go on then to chapter Production and Cost Utility and indifference curves The point is to find where on the

More information

N. Gregory Mankiw Principles of Economics. Chapter 15. MONOPOLY

N. Gregory Mankiw Principles of Economics. Chapter 15. MONOPOLY N. Gregory Mankiw Principles of Economics Chapter 15. MONOPOLY Solutions to Problems and Applications 1. The following table shows revenue, costs, and profits, where quantities are in thousands, and total

More information

MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.

MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11. MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.2011 TİIE 12:30 STUDENT NAME AND NUMBER MULTIPLE CHOICE. Choose the one

More information

21 : Theory of Cost 1

21 : Theory of Cost 1 21 : Theory of Cost 1 Recap from last Session Production cost Types of Cost: Accounting/Economic Analysis Cost Output Relationship Short run cost Analysis Session Outline The Long-Run Cost-Output Relations

More information

Chapter 04 Firm Production, Cost, and Revenue

Chapter 04 Firm Production, Cost, and Revenue Chapter 04 Firm Production, Cost, and Revenue Multiple Choice Questions 1. A key assumption about the way firms behave is that they a. Minimize costs B. Maximize profit c. Maximize market share d. Maximize

More information

Costs of Production and Profit Maximizing Production: 3 examples.

Costs of Production and Profit Maximizing Production: 3 examples. Costs of Production and Profit Maximizing Production: 3 examples. In this handout, we analyze costs and profit maximizing output decisions by looking at three different possible costs structures. Three

More information

Market Supply in the Short Run

Market Supply in the Short Run Equilibrium in Perfectly Competitive Markets (Assume for simplicity that all firms have access to the same technology and input markets, so they all have the same cost curves.) Market Supply in the Short

More information

Chapter 4: Elasticity

Chapter 4: Elasticity Chapter : Elasticity Elasticity of eman: It measures the responsiveness of quantity emane (or eman) with respect to changes in its own price (or income or the price of some other commoity). Why is Elasticity

More information

Monopoly WHY MONOPOLIES ARISE

Monopoly WHY MONOPOLIES ARISE In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s well-being?

More information

Economics 100 Exam 2

Economics 100 Exam 2 Name: 1. During the long run: Economics 100 Exam 2 A. Output is limited because of the law of diminishing returns B. The scale of operations cannot be changed C. The firm must decide how to use the current

More information

Profit and Revenue Maximization

Profit and Revenue Maximization WSG7 7/7/03 4:36 PM Page 95 7 Profit and Revenue Maximization OVERVIEW The purpose of this chapter is to develop a general framework for finding optimal solutions to managerial decision-making problems.

More information

Revenue Structure, Objectives of a Firm and. Break-Even Analysis.

Revenue Structure, Objectives of a Firm and. Break-Even Analysis. Revenue :The income receipt by way of sale proceeds is the revenue of the firm. As with costs, we need to study concepts of total, average and marginal revenues. Each unit of output sold in the market

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics Fall 2007, Quiz #6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) A monopoly is

More information

Econ 102 Aggregate Supply and Demand

Econ 102 Aggregate Supply and Demand Econ 102 ggregate Supply and Demand 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, ggregate Supply

More information

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Test 2 Review Econ 201, V. Tremblay MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Barbara left a $25,000 job as an architect to run a catering

More information

Name Eco200: Practice Test 1 Covering Chapters 10 through 15

Name Eco200: Practice Test 1 Covering Chapters 10 through 15 Name Eco200: Practice Test 1 Covering Chapters 10 through 15 1. Many observers believe that the levels of pollution in our society are too high. a. If society wishes to reduce overall pollution by a certain

More information

The Circular Flow of Income and Expenditure

The Circular Flow of Income and Expenditure The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital

More information

Long-Run Average Cost. Econ 410: Micro Theory. Long-Run Average Cost. Long-Run Average Cost. Economies of Scale & Scope Minimizing Cost Mathematically

Long-Run Average Cost. Econ 410: Micro Theory. Long-Run Average Cost. Long-Run Average Cost. Economies of Scale & Scope Minimizing Cost Mathematically Slide 1 Slide 3 Econ 410: Micro Theory & Scope Minimizing Cost Mathematically Friday, November 9 th, 2007 Cost But, at some point, average costs for a firm will tend to increase. Why? Factory space and

More information

Microeconomics Topic 7: Contrast market outcomes under monopoly and competition.

Microeconomics Topic 7: Contrast market outcomes under monopoly and competition. Microeconomics Topic 7: Contrast market outcomes under monopoly and competition. Reference: N. Gregory Mankiw s rinciples of Microeconomics, 2 nd edition, Chapter 14 (p. 291-314) and Chapter 15 (p. 315-347).

More information

CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION

CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION Chapter in a Nutshell Now that we understand the characteristics of different market structures, we ask the question

More information

Employment and Pricing of Inputs

Employment and Pricing of Inputs Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level

More information

An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.

An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers. 1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.

More information

Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2

Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2 Factor Markets Problem 1 (APT 93, P2) Two goods, coffee and cream, are complements. Due to a natural disaster in Brazil that drastically reduces the supply of coffee in the world market the price of coffee

More information

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit 1) Accountants include costs as part of a firm's costs, while economists include costs. A) explicit; no explicit B) implicit;

More information

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam. , Fall 2007 Version A Special Codes 00000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 201 Final Exam 1. For a profit-maximizing monopolist, a. MR

More information

What is a cost? What is an expense?

What is a cost? What is an expense? What is a cost? What is an expense? A cost is a sacrifice of resources. An expense is a cost incurred in the process of generating revenues. Expenses are recorded at the same time that the associated revenues

More information

chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve

chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve chapter 9 The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole. Perfect Competition and the >> Supply Curve Section 3: The Industry

More information

Chapter 011 Project Analysis and Evaluation

Chapter 011 Project Analysis and Evaluation Multiple Choice Questions 1. Forecasting risk is defined as the: a. possibility that some proposed projects will be rejected. b. process of estimating future cash flows relative to a project. C. possibility

More information

Microeconomics and mathematics (with answers) 5 Cost, revenue and profit

Microeconomics and mathematics (with answers) 5 Cost, revenue and profit Microeconomics and mathematics (with answers) 5 Cost, revenue and profit Remarks: = uantity Costs TC = Total cost (= AC * ) AC = Average cost (= TC ) MC = Marginal cost [= (TC)'] FC = Fixed cost VC = (Total)

More information

Production Function in the Long-Run. Business Economics Theory of the Firm II Production and Cost in the Long Run. Description of Technology

Production Function in the Long-Run. Business Economics Theory of the Firm II Production and Cost in the Long Run. Description of Technology Business Economics Theory of the Firm II Production and Cost in the ong Run Two or more variable input factors Thomas & Maurice, Chapter 9 Herbert Stocker herbert.stocker@uibk.ac.at Institute of International

More information

MATH MODULE 5. Total, Average, and Marginal Functions. 1. Discussion M5-1

MATH MODULE 5. Total, Average, and Marginal Functions. 1. Discussion M5-1 MATH MODULE Total, Average, and Marginal Functions 1. Discussion A very important skill for economists is the ability to relate total, average, and marginal curves. Much of standard microeconomics involves

More information

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) A major characteristic of monopoly is A) a single seller of a product. B) multiple sellers of a product. C) two sellers of a product. D) a few sellers

More information

At the end of Chapter 14, you will be able to answer the following:

At the end of Chapter 14, you will be able to answer the following: 1 How to Study for Chapter 14 Costs of Production (This Chapter will take two class periods to complete.) Chapter 14 introduces the main principles concerning costs of production. It is perhaps the most

More information