Econ Exam 4

What is an explicit cost?

A cost that has a physical monetary value of which has to be spent to produce a good

What is an implicit cost?

An opportunity cost. It is the cost of giving up the opportunity to produce something else to produce what you are producing

What is the total cost?

The total cost is the sum of the Explicit and Implicit costs.

What is Economic Profit?

The total revenue minus the total cost

What is a normal profit rate?

The point at which the economic profit equals zero

What is accounting profit?

The explicit cost subrtracted from the total revenue

What is the short run?

The market in which you are selling a product and you have both fixed and variable costs associated with doing business

What is the long run?

A period of time in the market in which you have time to adjust to market demand and do not have fixed costs associated with doing business

What is the Total Fixed Cost?

The sum of all fixed costs associated with doing business in a given period of time

What is the average fixed cost?

The TFC/Q, therefore, it is the fixed cost associated with producing n amount of a product.

What is the marginal cost?

The cost associated with producing one more good compared to the last

What is Total Product?

The quantity of product produced

What is marginal product?

the additional output of creating one more unit of capital or labor. Thus if you hire one more employee how much more gets made?

What is the average product?

The Total Product/ number of laborers

What is an economy of scale?

You are lowering the marginal cost of a product until reaching the lowest amount possible, by scaling the business you lower marginal cost

What is diseconomies of scale?

Once reaching a breaking point scaling the business any more increases costs and is less profitable

What is constant returns of scale?

Scaling the company has no change on costs and is already the lowest it possibly can be

What is Marginal revenue?

Amount of money gained for selling one unit of a given product

What is marginal revenue product?

the additional revenue gained by adding one more unit of production

What is a sunk cost?

Money that has already been spent. You must disregard the sunk cost as you can no longer change it. Do not make decisions based off sunk costs.

What is the law of diminishing returns?

As you increase the total product you will begin making less and less revenue with each unit added compared to the first, until it becomes no longer profitable to increase production.

What factors cause cost curves to shift?

Government policies, raw cost of materials, technology advancements

What is the Equation to find the AFC

TFC/Q

What is the equation to find AVC?

TVC/Q

What is the equation to find the ATC

AVC + AFC

What is the equation to find the MC?

The change in the TVC / The change in the Q

How can you identify if a market is in the long run?

There is no fixed cost

If MP increases what happens to the MC

MC decreases

If MP decreases what happens to MC

MC increases

Assume that a firm is producing 200 gallons of output. Its marginal cost is $10, its average fixed cost is $2, and its AVC is $6. Use this information to answer the following questions. Is this a short run or long run situation? What is the firms ATC?

Long run. $400

Assume that a firm is producing 200 gallons of output. Its marginal cost is $10, its average fixed cost is $2, and its ATC is $10. Use this information to answer the following questions. What is the Firms AVC? If the firm reduces the output to 100 gallons, would we expect the ATC to decrease or increase?

AVC = $8. Increase

Assume the a firm is producing 200 gallons of outpot. It sells this product for $10 per gallon. Its marginal cost is $10, its AFC is $0, and its AVC is $10. Use this information to answer the following questions. A. Is this a short run or long run? B. What is the TR? C. What is the firms ATC? D. What is firms TC? E. What is the firms Economic Profit? F. Is this firm earning a normal rate of profit?

A. Long Run B. $2000 C. $10 D. $2000 E. 0 F. Yes

John has inherited a business and is deciding whether to give up his current job which pays $30,000 per year or to run the business or to sell the business. The business has assets of $100,000 of property and $50,000 of inventory. If he sells this property and the inventory he can invest this money and recieve 10% annual return on his investment. If John quits his job to run the business, he anticipates that the business will generate $150000 of annual revenue and that annually he will need to pay $40,000 for labor and $60,000 to purchase inventory. Answer the following questions. If John Runs the business what are his annual total implicit costs? What are the Annual Total explicit costs? What is his annual accounting profit? What is his annual economic profit? Would it be more profitable for John to give up his job or to sell the business?

1. $30,000 + $15,000

2. $40,000 + $60,000

3. TR - EC = $150,000 - $100,000 = $50,000

4. EC = $150,000 - $145,000 = $5,000

5. Give it up he is $5,000 better off

What are the two ways to maximize profits?

Rent Seeking and produce and sell to buyers

What is the difference between accounting profit and economic profit?

Account profit only takes into account explicit costs

What is a price taker?

A firm that must match the set price, they have no power to change the price and must sell at the price for the day

What is pure competition?

A market in which there are many small competitors and no one company can change the price

What is a barrier to entry?

Is the cost to enter into a given market

What is marginal revenue?

The amount of revenue gained or lost per a given unit, often labor

What is a shut down?

A factor shuts down for a period of time because there is too much economic profit being lost.

What is allocative efficiency?

The Price must equal the Marginal cost. You are producing the optimal amount of a product for the market, and everyone that is willing and able to buy is purchasing the product

What is productive efficiency?

you have productive efficiency if you are the lowest possible ATC and if MC = ATC

What is X-inefficiency?

If the ATC > P and if economic profit < 0

What are the characteristics of a purely competitive market?

Many small firms in the same market, no one firm can change the price of the product, identical product, and there are low barriers to entry

What does the Demand curve for a firm in the purely competitive market?

It is perfectly elastic

What is the profit maximization rule? in other words, when a price taker is maximizing its profit, what will its marginal revenue equal?

the MC

What is the short run equilibrium situation for a purely competitive firm?

Where MC = MR

What is the difference between short run shut down and going out of business? In order to maximize profit, when should a firm shut down in the short run?

A short run shut down happens when the AVC > MR you are no longer losing less money staying open than you would be just hemoraging the fixed cost. The difference is you must shut down until there is enough exit and the economic profit becomes equal to zero

Assume that firms are attempting to maximize their profits. When should a purely competitive firm shut down in the short run?

When the AVC > MR

What is the Long Run Equilibrium situation for a purely competitive firm?

MR = AVC = MC

In the long run, do purely competitive firms tend to have allocative efficiency? Do they tend to X- inefficiency? Do they tend to have productive efficiency?

They do have allocative efficiency, No to X-inefficiency, and yes to productive efficiency

What is a production possibilities curve?

The maximum amount of production that a market can produce using the resources as efficiently as possible

What is comparative advantage?

The ability for a country to produce a product with lower opportunity cost than another country

What is the law of comparative advantage?

The law states that countries should specialize in producing goods they are good at producing and trade with other countries for the things they are not good at

What are consumption possibilities?

It is how much a country can consume outside of their production possibilities curve with trade

What is international trade?

the exchange of one product for another product between countries

What is free trade?

the exchange of goods between countries with zero restrictions on amount of trade

What are imports?

Goods that are brought into a country from another source

What are exports?

Goods that leave the country to another country through trade

What is a trade surplus?

The