BUEC 211 - Quiz 2

What are explicit costs

Direct, out-of-pocket payments for labour, capital, energy and materials

What are implicit costs?

Reflect foregone opportunities rather than explicit or current expenditures.

Opportunity cost

The cost of forgoing the next best alternative when making a decision.

What type of cost is the most difficult to determine the opportunity cost of?

Durable cost. Last more than one year but value changes overtime.

Sunk costs

Past expenditures that cannot be recovered.

Should sunk costs be ignored by managers making decisions?

Yes.

What are the three key cost measures for making decisions based on opportunity cost?

Variable, fixed and total cost.

What happens to the average fixed costs when output rises?

AFC falls because the fixed cost is spread over more units.

What is the formula for average fixed cost

Average Fixed Cost = Fixed Cost/Quantity

What happens to average variable cost when output rises

Can rise or fall.

What is the formula for average variable cost

Average Variable Cost: Variable Cost /Quantity

What happens to average cost with an increase in output

May increase or decrease

What is the formula for Average total cost

Average Total Cost = Average variable cost + Average fixed cost

MC Formula

Marginal Change = Change in Cost / Change in Quantity

What determines the shape of a firm’s marginal and variable cost curve at a given input price in the short run?

The production function

What determines the shape of the production function in the short run?

Diminishing marginal returns

How are marginal costs and the marginal production of labour related?

Marginal cost decreases as Marginal Production of Labour increases.

How are Average costs and the Average production of labour related?

As AVC decreases, APL increases

How are the shapes of the variable cost curves and the marginal cost curves determined?

The production function

What happens to the average cost and variable cost when the marginal cost is below them?

The average cost curve and variable cost curve fall

What happens to the average cost and variable cost when the marginal cost is above them?

The average cost curve and variable cost curve rise.

What is the isocost line in the long term?

all the combinations of labor and capital that have the same total cost.

What are the three key properties of the isocost line

• The point at which the isocost line hits the capital and labor axes depends on the firms cost and on the price of the inputs.

• Isocost lines that are farther from the origin have a higher cost than those closer to the origin (we want closer to the origin)

• The slope is the rate at which the firm can trade capital for labour in input markets.

Isoquant definition

How technology allows the firm to trade off labor and capital to produce output

Isocost

How the firm is able to trade off labor and capital in the market

When does the economically efficient outcome occur

When the trade off of the isoquant and isocost are the same.

How can the firm get to the economically efficient outcome

When the firm choses the combination of inputs that is on the lowest isocost line that touches the isoquant while at the desired level of production.

What are the three equivalent rules for minimizing costs in the long run

• The lowest Isocost rule

• The tangency rule

• The last-dollar rule

What is the lowest isocost rule

the firm minimizes its cost by using the combination of inputs on the isoquant that is on the lowest isocost line that touches the isoquant.

What is the tangency rule?

At the minimum-cost buncle, the isoquant is tangent to the isocost line. The slope of the isoquant (MRTS) and the slope of the isocost are equal. T

What is the Last-Dollar Rule?

Cost is minimized if inputs are chosen so that the last dollar spent on labor as as much extra output as the last dollar spent on capital.

What is the key determinant in the long run

Marginal Returns to scale H

What characteristics of the production function have to have in order for the Long-Run Average Cost to be U-shaped

• Increasing returns to scale at low levels of output

• Constant returns to scale at intermediate levels of outputs

  • Decreasing returns to scale at high levels of outputs

when do economies of scale occur?

When average costs fall as output expands

When do diseconomies occur?

When average costs rise as output expands.

When are there no economies to scale?

when average costs do not change with output

In what type of market structure does the Long-Run Average Costs have U-shaped curves?

In perfectly competitive markets

In what type of market structure does the Long-Run Average Costs NOT have U-shaped curves?

In a non-competitive market. LRAC curves can have any shape.

In what position are Long-run average curves in relation to short-run average curves on a graph?

Long-run average costs are aWlways equal to or below short-run average costs

Why might a firm’s costs decline over time?

Because of increasing returns to scale, technological progress, and learning by doing.

What does learning by doing do to the average cost of production?

Causes it average cost to fall over time

What is Moore’s Law?

As we produce more the costs will decrease

What are economies of scope?

Goods that are less expensive to produce jointly rather than separately

What happens if SC is greater than zero

It is cheaper to produce goods jointly, meaning there are economies of scope.

What happens if SC is less than zero

It is cheaper to produce the goods separately, meaning there are diseconomies of scope