1 Production and Costs Bibliography: Mankiw and Taylor, Ch. 6.
2 The Importance of Cost in Managerial Decisions Containing costs is a key issue in managerial decisionmaking Firms seek to reduce the number of people on the payroll while still performing the same services Firms seek to reduce the cost of capital through a variety of financial operations Firms consolidate operations in order to share resources mergers usually involve staff cuts Firms outsource components of their businesses and seek to hire temporary staff instead of committing to permanent, full time staff
3 Costs of Production/Supply Relevant costs: all costs that are affected by a management decision Example: restaurant Inputs (e.g. ingredients used to cook food in a restaurant) Equipment (e.g. kitchen appliances, tables, cutlery) Workers (e.g. cooks, waiters) Energy (e.g. electricity, gas...) Rent (e.g. building) Other services (e.g. accounting, cleaning...)
4 Sunk Costs and Incremental Costs Sunk cost: a cost that was incurred in the past and is not affected by current managerial decisions e.g. the cost of past investment in infrastructure resources (such as special purpose factory buildings, rail tracks or fixed line telephony Sunk costs are fixed (i.e. independent from the amount of output produced) and have to be incurred even if the firm shuts down (i.e. stops producing) the firm can only free itself from sunk costs if it closes down and sells the infrastructure Incremental cost: a cost that is affected by current managerial decisions it is measured by the change in cost resulting from a change in a particular activity (e.g., construction of a new building, entry into the market with a new product, development of new software )
5 Fixed Costs and Variable Costs Fixed cost is a cost that does not vary with the level of business activity (i.e. amount of output produced) a sunk cost is a type of fixed cost Variable cost is a cost that does vary with the level of business activity (i.e. amount of output) Fixed and variable costs depend on a time reference a cost that is fixed in the short run may be variable in the long run
6 Time Periods: Fixed and Variable Costs in the Short and Long Run Fixed and variable costs depend on a time reference a cost that is fixed in the short run may be variable in the long run: The production capacity, or Scale of operations, of a factory is the maximum amount of output a factory is capable of producing over a fixed period of time Scale of operations usually cannot be changed in the short run since it takes time for capacity investments to become operational Hence, capacity/scale investment costs are fixed in the short run, since they do not change with the amount of output produced In the long run, all costs are variable, since the firm can change its scale of operations and sell infrastructure
7 Opportunity Costs and Out-of- Pocket Costs Opportunity cost is the amount foregone when choosing one activity over the next best alternative what you give up to get a something Out-of-pocket cost is the monetary cost associated with the choice of one activity over another For example, the out-of-pocket cost of leaving one s job to attend school on a full-time basis is the tuition, books, etc.; the opportunity cost is the loss of income (wages) from the job
8 Opportunity Costs of Investment This is the income (e.g. interest) not earned on financial capital: When you invest money on a firm or financial asset you are foregoing the returns for alternative uses of your savings Example: you invest 1,000 in shares of business and obtain a yearly return of 10% ( 100); the best alternative use for the 1,000 would be to buy Treasury bills that would have paid you a 5% return ( 50) this is your opportunity cost for the use of the 1,000 Your accounting profit corresponds to the financial return of 100; Your economic profit corresponds to the financial return minus the opportunity cost: = 50
9 Implicit Costs vs. Explicit Costs A firm s explicit costs include all production costs that require an outlay of money by the firm these are the costs that matter for accountants Implicit costs do not require an outlay of money by the firm; what matters is the earnings foregone by investing in the firm (opportunity costs) these costs matter for economists For accountants, the firm s production costs include only explicit costs For economists, the firm s total production costs include the explicit costs plus all the opportunity costs from choosing to invest (i.e. be) in the market
10 Costs: Economists vs. Accountants
11 Exercises To an economist, total costs include: A) explicit, but not implicit costs. B) implicit, but not explicit costs. C) explicit and implicit costs. D) neither explicit nor implicit costs. Costs of production that change with the rate of output are: A) sunk costs. B) opportunity costs. C) fixed costs. D) variable costs.
12 Exercises Economic profit equals accounting profit minus A) explicit costs. B) implicit costs. C) fixed costs. D) variable costs. Which of the following is most likely a fixed cost? A) expenditures for raw materials. B) wages for unskilled labor. C) fuel cost. D) property taxes. Changes in short-run total costs result from changes in only: A) variable costs. B) fixed costs. C) zero. D) total fixed costs.
13 Production, Resources, and the Law of Diminishing Returns The law of diminishing returns states that in all productive processes, adding more of one factor of production while holding all others constant, will at some point yield lower returns per-unit The law of diminishing returns does not imply that adding more of a factor will decrease total production This occurs for two main reasons: Factors of production are not perfectly substitutable (or interchangeable) Resources are finite, meaning that the per-unit cost of adding ever-increasing amounts of a factor (e.g. labor) would will become higher and higher
14 The Production Function The Production Function determines the relationship between the quantity produced by a firm (output) and the amount of inputs (factors) used in production The Marginal Product of a production factor is the additional level of output achieved by adding one more unit of that input to the production process Diminishing Marginal Product is the property whereby the marginal product of an input declines as the quantity of the input increases (an outcome of the law of diminishing returns) Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment
15 Production Function and Total Cost: A Pizza Factory/Restaurant
16 Quantity of Output (pizzas per hour) Pizza Factory/Restaurant Production Function Production function Output increases get smoother as the quantity of input rises because of diminishing marginal product Number of Workers Hired
17 The Cost Function The Cost Function determines the relationship between the quantity produced by a firm (output) and the total cost of production The relationship between the quantity a firm can produce and its costs determines pricing decisions
18 Fixed and Variable Costs Total Cost (TC): the cost of all inputs involved in the production of output Q; it is expected to increase as Q increases: C = C (Q) = TVC + TFC Total fixed cost (TFC) includes all costs that do not change with output Total variable cost (TVC): the cost associated with variable inputs, found by multiplying the number of units of output by the unit price of inputs: TVC = TVC (Q)
19 Average and Marginal Costs Total average cost (AC) is the total cost per unit produced: AC = TC / Q; AFC = TFC / Q; AVC = TVC / Q Marginal cost (MC) is the rate of change in total variable cost: MC = dc(q) / dq = dtvc(q) / dq The law of diminishing returns implies that MC will eventually increase, since the productivity of inputs decreases with their use
20 The Various Measures of Cost: A Coffee Shop
21 Coffee Shop s Total Cost Curve Total Cost $ Total Cost curve The total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product Quantity of Output (cups of coffee per hour)
22 Exercises The Average fixed cost: A) does not change as total output increases or decreases. B) varies directly with total output. C) falls continuously as total output expands. D) rises as the output is expanded. The Average fixed cost is A) AC minus AVC. C) AVC minus MC. B) TC divided by Q. D) TC minus TVC. When a firm increased its output by one unit, its AFC decreased. This is an indication that: A) the law of diminishing returns has taken effect. B) MC < AFC. C) the firm is spreading out its total fixed cost. D) AVC < AFC.
23 Relationship Between Average Costs and Marginal Costs: MC < AC If MC < AC, producing an additional unit of output costs less than the unit cost of the units already produced hence producing that additional unit will lower the total average cost e.g. if the firm is producing 10 units at an average cost of 2 per unit ( 20 total cost) and the marginal cost of producing one more unit is equal to 1, then the new average cost will be: AC = ( ) / 11 = 1,91 which is lower than 2
24 Relationship Between Average Costs and Marginal Costs: MC > AC If MC > AC, producing an additional unit of output costs more than the unit cost of the units already produced hence producing that additional unit will increase the total average cost e.g. if the firm is producing 10 units at an average cost of 2 per unit ( 20 total cost) and the marginal cost of producing one more unit is equal to 3, then the new average cost will be: AC = ( ) / 11 = 2,09 which is higher than 2
25 Relationship between Average Costs and Marginal Costs When AC = MC, producing an additional unit does not change the total average cost If AC decreases when MC < AC and increases when MC > AC, then the minimum average cost is reached when MC = AC MC ATC
26 The Various Measures of Cost: A Coffee Shop (Again)
27 Costs $ Average and Marginal Cost Curves for the Coffee Shop MC ATC AVC AFC Quantity of Output (cups of coffee per hour) This figure shows the average total cost (ATC), average fixed cost (AFC), average variable cost (AVC), and marginal cost (MC). The cost curves show three features that are common to many firms: (1) Marginal cost rises with the quantity of output; (2) The average total cost curve is U-shaped (3) The marginal-cost curve crosses the average-totalcost curve at its minimum point.
28 Typical Shapes of Cost Curves Marginal cost eventually rises with the quantity of output. The average total cost curve is U-shaped. The marginal cost curve crosses the average total cost curve at its lowest point.
29 Marginal and Variable Cost Curves for a Typical Firm Costs $ MC ATC Quantity of Output Many firms experience increasing returns (i.e. decreasing average costs, marginal costs lower than average costs) before diminishing returns set in (i.e. increasing average costs and marginal costs greater than average costs)
30 Some Typical Total Cost Function Specifications The previous analysis assumes a linear specification for the total cost function (relating total cost and output): TC = a + b.q (were MC = AVC = b) Alternative specifications of the total cost function include: Quadratic relationship: as output increases, total cost increases at an increasing rate: TC = a + b.q + c.q 2 Cubic relationship: as output increases, total cost first increases at a decreasing rate, then increases at an increasing rate: TC = a + b.q + c.q 2 + d.q 3
31 Short and Long Run Costs Assumptions: the firm employs two inputs, labor and capital the firm produces a single product the firm operates in a short-run production period where labor is variable, capital is fixed the firm employs a fixed level of technology and the law of diminishing returns applies the firm operates at every level of output in the most efficient way (i.e. minimizes costs) the firm operates in perfectly competitive input markets and must pay for its inputs at a given market rate (it is a price taker )
32 Short Run Cost Functions Total fixed cost (TFC) is the total cost of using the fixed input, capital (K) Total variable cost (TVC) is the total cost of using the variable input, labor (L) Total cost (TC) is the total cost of using all the firm s inputs: TC = TFC + TVC Average fixed cost (AFC) is the average per-unit cost of using the fixed input K: AFC = TFC/Q
33 Short Run Cost Functions Average variable cost (AVC) is the average per-unit cost of using the variable input L: AVC = TVC/Q Average total cost (AC) is the average per-unit cost of all the firm s inputs: AC = AFC + AVC = TC/Q Marginal cost (MC) is the change in a firm s total cost (or total variable cost) resulting from a unit change in output: MC = dtc / dq = dtvc / dq
34 Effects of Changes in Short Run Costs: Fixed Costs A reduction in the firm s fixed cost would cause the average cost line to shift downward Consider that the fixed cost is 200, while the variable costs are 2 per unit produced; then: TC = Q Suppose the fixed cost decreases to 140; the new cost curve will have the same slope but a lower intercept with the Y-axis: TC = Q The average total cost will be lower by: ( )/Q = 60/Q
35 Effects of Changes in Costs: Variable Costs A reduction in the firm s variable cost would cause all three cost lines (AC, AVC, MC) to shift downward Consider the same cost curve: TC = Q; then: AVC = 2.Q/Q = 2 and MC = dtc / dq = 2 Suppose the variable cost coefficient decreases to 1,2 per unit produced; then, the new cost curve will have the same intercept with the Y-axis but a smaller slope: TC = ,2.Q AC, AVC and MC all decrease by (2-1,2) = 0,8
36 Exercises The relationship between MC and AC can best be described as: A) when AC increases, MC starts to increase. B) when MC increases, AC starts to increase. D) when MC exceeds AC, AC increases. When a firm increased its output by one unit, its AC rose from $45 to $50. This implies that its MC is: A) $5. B) between $45 and $50. B) C) greater than $50. D) Cannot be determined from the data. When a firm's MC curve shifts to the right, it implies that A) new firms are entering the market. B) labor productivity is decreasing. C) labor productivity is increasing. D) the firm's total fixed costs are decreasing.
37 Exercises If a firm's rent increases, how will it affect the firm s cost structure? A) AVC will increase. C) TFC will increase. B) MC will increase. D) All of the above will increase. When a firm increased its output by one unit, its AC decreased, thus: A) MC < AC. B) MC = AC. C) MC < AFC. D) the law of diminishing returns has not yet taken effect. Which of the following relationships implies that a given firm's short-run cost function is linear? A) MC = AC C) AC = AFC + AVC B) MC = AVC D) MC > AC
38 Long-run Costs In the long run, all inputs to a firm s production function may be changed: Because there are no fixed inputs, there are no fixed costs: LRTC = C(Q) Increases in long run output are increases (i.e. investments) in the capacity (scale) of production The firm s long run marginal cost is associated to returns to scale (i.e. the capital invested in production capacity) A firm experiences constant returns to scale when longrun average total cost stays the same as the quantity of output changes
39 Average Total Cost Average Total Cost in the Short and Long Runs SRAC in short run with small factory SRAC in short run with medium factory SRAC in short run with large factory LRAC 10, ,000 Quantity of Cars per Day The LRAC is a curve that encircles (envelopes) the SRACs for each scale at the points where each SRAC achieves efficiency.
40 Long Run Average Cost Function In long run, the firm can choose any level of capacity (or scale of production) Once it commits to a level of capacity, at least one of the inputs (usually capital) must be fixed Efficiency then becomes a short run problem in which the firm chooses the optimal level of those inputs that may change in short run (i.e. labor) For each scale (capacity) of production there will be a short run average cost curve (SRAC) The long run average cost curve (LRAC) is an envelope of SRAC curves, and outlines the lowest per-unit costs the firm will incur over a range of output.
41 Increasing Returns to Scale (Capital) When a firm experiences increasing returns to scale, a proportional increase in all inputs increases output by a greater proportion As the scale of operations increases by some percentage, long run total cost of increases by some lesser percentage Hence, long run average total cost falls as the scale (capacity) of production increases Under these circumstances, a firm is said to experience increasing returns to scale (i.e. economies of scale) In the short run, when the scale of production is fixed, any reductions in short run average costs resulting from increases in output result from better use of available capacity of production, and not from scale economies
42 Decreasing Returns to Scale (Capital) Economies of scale occur where a firm s long run average cost (LRAC) declines as output/scale increases Diseconomies of scale apply to the opposite situation: a proportional increase in all inputs increases output by a smaller proportion as the scale of operations increases by some percentage, long run total cost of production increases by a greater percentage Hence, long run average total cost (LRAC) increases as the scale (capacity) of production increases
43 Economies of Scale Average Total Cost ATC in short run with small factory ATC in short run with medium factory ATC in short run with large factory ATC in long run 10,000 Economies of scale Constant returns to scale Diseconomies of scale 0 1,000 Quantity of Cars per Day
44 U-shaped Long Run Average Cost In general, the LRAC curve is u-shaped, meaning that there is an initial section with increasing returns to scale, followed by a section with decreasing returns. The minimum efficient scale (MES) is the minimum capacity for which the the LRAC is minimized (in this case, Q=40)
45 Reasons for the Existence of Economies of Scale Specialization of labor and capital Prices of inputs may fall with volume discounts in firm s purchasing Use of capital equipment with better price-performance ratios Larger firms may be able to raise funds in capital markets at a lower cost Intellectual property costs (e.g. patents) may be spread over a larger output Larger firms may be able to spread out promotional costs
46 Reasons for the Existence of Diseconomies of Scale Scale of production is not optimal for the total market demand (too small) Transportation costs tend to rise as production grows, due to handling expenses, insurance, security, and inventory costs Cost of capital increases as the firm borrows more in order to increase capacity
47 Economies of Scope Economies of scope occur when firm s unit cost is reduced by producing two or more products jointly rather than separately Scope Economies are similar to scale economies but apply to a range of products: The joint production, sale and/or distribution cost of two or more products is less than the cost of pursuing them separately Examples: ( Q, 0) + CT( 0, Q ) CT( Q Q ) CT > 1 2 1, Toiletries: soap, shampoos, conditioners, bath gel Distribution: supermarkets vs. specialized stores Marketing economies, R&D, warehouse costs, suppliers discounts 2
48 Learning/Experience Economies Learning economies: the more experience a firm accumulates in producing a particular product, the lower its costs per unit The unit or average cost of production decreases with the accumulated output Learning curve: line showing the relationship between labor cost and additional units of output: A downward slope indicates additional cost per unit declines as the level of output increases because workers improve with practice The production process also improves as engineers and other development personnel gain more experience
49 Learning Curve ( ) = αq β C Q C Q Q Where: C(Q) is the unit cost of accumulated production α is the cost of the first unit β>0 is the parameter that measures the intensity of the economies of experience
50 Exercises Which of the following statements best represents a difference between short run and long run cost? A) Less than one year is considered the short run; more, long run. B) There are no fixed costs in the long run. C) In the short run labor is variable and capital is fixed. D) All of the above are true. Economies of scale are indicated by: A) declining long-run AVC. C) declining long-run AC. B) declining long-run AFC. D) declining long-run TC. As a firm attempts to increase production, its long-run average costs eventually rise because of: A) the law of diminishing returns. C) fixed capital. B) diseconomies of scale. D) insufficient demand.
51 Exercises Economies of scale are created by greater efficiency of capital and by: A) longer chains of command in management. C) smaller plant sizes. B) better wages for labor. D) increased specialization of labor. Which level indicates the point of maximum economic efficiency? A) lowest point on AC curve. C) lowest point on MC curve B) lowest point on AVC curve D) None of the above Which of the following actions has the best potential for experiencing economies of scope? A) producing a product that has appeal to a wider segment of the market B) producing computers and software C) producing spaghetti and soft drinks D) producing cars and trucks
52 Exercises Which of the following is the best example of economies of scope? A) Coca-Cola expands its global operations to sub-saharan Africa. B) Alcohol for car fuel is produced from corn. C) Amazon.com decides to rent out its website to independent companies. D) A company gets bigger discounts for bulk purchases. The learning curve indicates that: A) economies of scale are taking effect. B) repetition of various production tasks cause unit costs to decrease. C) workers must learn new skills in order to improve. D) it takes time to learn a new skill.
53 Additional Exercises How would each of the following affect the firm's marginal, average, and average variable cost curves? a. An increase in wages. b. A decrease in the energy costs c. The government fines the firm a fixed amount due to excess pollution. d. The rent that the firm pays on the building that it leases decreases. Carefully explain if the following statements are true or false. a. If average cost is increasing, marginal cost must be increasing. b. If there are diminishing returns, the marginal cost curve must have a positive slope. For each of the following cost functions, compute MC, AC, and AVC a. TC = Q b. TC = Q + 0,2.Q 2 Explain whether there are diminishing or increasing returns.
Firm Behavior and the Costs of Production WHAT ARE COSTS? The Firm s Objective The economic goal of the firm is to maximize profits. Total Revenue, Total Cost, and Profit Total Revenue, Total Cost, and
The Theory and Estimation of Cost Chapter 8 Managerial Economics: Economic Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young The Theory and Eti Estimation
The s of Production Chapter 13 Copyright 2001 by Harcourt, Inc. The s of Production The Law of Supply: Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.
The Costs of Production PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 What are Costs? Total revenue = amount a firm receives for the sale of its output Total cost = market
ECON 101 Introduction to Economics1 Session 10 Cost Concept Lecturer: Mrs. Hellen A. Seshie-Nasser, Department of Economics Contact Information: email@example.com College of Education School of Continuing
Lesson 7 Costs of Production Introduction Our study now combines what we have learned about price from Lesson 5 with utility theory from Lesson 6 to allocate resources among cost factors. Consider that
Chapter 13. The Costs of Production The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies
Chiang_3E_CT_Micro_CH07_Layout 1 3/20/14 2:29 PM Page 175 7 Production and Cost Production and Cost Are Behind Decisions About Supply Having looked in the last chapter at what lies behind demand curves
Semester-I Course: 01 (Introductory Microeconomics) Unit IV - The Firm and Perfect Market Structure Lesson: Short-Run Costs and Output Decisions Lesson Developer: Jasmin Jawaharlal Nehru University Institute
www.liontutors.com ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions 1. A A large number of firms will be able to operate in the industry because you only need to produce a small amount
ECON 260 (2,3) Practice Exam #4 Spring 2007 Dan Mallela Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Profit is defined as a. net revenue
CHAPTER 12 Production and Cost Analysis I Production is not the application of tools to materials, but logic to work. Peter Drucker McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All
23 Perfect Competition Learning Objectives After you have studied this chapter, you should be able to 1. define price taker, total revenues, marginal revenue, short-run shutdown price, short-run breakeven
Sample Test 3 Ch 10-13 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A cost incurred in the production of a good or service and for which
ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION 1. What is the Slope of PPC? What does it show? 2. When can PPC be a straight line? 3. Do all attainable combination of two goods that
CHAPTER 11 Firms in Perfectly Competitive Markets Chapter Summary and Learning Objectives 11.1 Perfectly Competitive Markets (pages 369 371) Explain what a perfectly competitive market is and why a perfect
PART II The Market System: Choices Made by Households and Firms PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N CASE FAIR OSTER PEARSON 2012 Pearson Education, Inc. Publishing as Prentice Hall
Unit 5. Producer theory: revenues and costs Learning objectives to understand the concept of the short-run production function, describing the relationship between the quantity of inputs and the quantity
ECON 21 Principles of Microeconomics (Summer 216) The Production Process and of Production Relevant readings from the textbook: Mankiw, Ch. 13 The of Production Suggested problems from the textbook: Chapter
1. If the per unit cost of production falls, then... A.) the supply curve shifts right (or down) B.) there is a downward movement along the existing supply curve which does not shift C.) the supply curve
Chapter 5 The Behavior of Firms This chapter focuses on how producers make decisions regarding supply. Individuals demand goods and services. Firms supply goods and services. An important assumption is
1. What is the main goal of a firm? A) To be as big as possible. B) To hire as many people as possible. C) To make as much profit as possible. D) All of the above answers are correct. Practice Exam 3 Questions
HOMEWORK 1998-2 ECON 103 - SFU the law of diminishing returns have on short-run costs? Be specific. (e) âwhen... And when marginal product is diminishing, marginal cost is rising.â Illustrate and... ECON
Perfectly Competitive Supply Chapter 6 McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives 1.Explain how opportunity cost is related to the supply
NAME: STUDENT ID: Final Exam ECON 101, Section 2 summer 2004 Ying Gao Instructions Please read carefully! 1. Print your name and student ID number at the top of this cover sheet. 2. Check that your exam
Bremen School District 228 Social Studies Common Assessment 2: Midterm AP Microeconomics 55 Minutes 60 Questions Directions: Each of the questions or incomplete statements in this exam is followed by five
Economics 4020 Dr. Rupp Test #1 Fri. Sept 23 rd, 2011 20 Multiple Choice questions (2.5 points each) Pledge (sign) I did not copy another student s answers 1. The profit maximization rule for a firm is
MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM One of the concepts mentioned in both Units I and II was and its components, total cost and total revenue. In this unit, costs and revenue
The Costs of Producing to Mass Markets Variable Costs, Fixed Costs and Minimising Them Mass Market Decisions Previous lectures: negotiations for sale Mass markets: decide on many units to sell at a given
ECONOMICS 10-008 Dr. John Stewart Sept. 30, 2003 Exam 1 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet using a No.2 pencil. Note a)=1, b)=2
Review, First Quiz Managerial Economics: Eco 685 Quiz Date: Thursday, September 7, 2017 All questions come from the class notes: Introduction, Production Theory, and Cost Theory up to and including section
8 Perfect Competition CHAPTER 8 PERFECT COMPETITION 167 Figure 8.1 Depending upon the competition and prices offered, a wheat farmer may choose to grow a different crop. (Credit: modification of work by
Lecture 7 Production Cost and Theory of the Firm Business 5017 Managerial Economics Kam Yu Fall 2013 Outline 1 Cost Structure of a Firm Production Costs Marginal Cost in the Short Run 2 Supply Function
The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph
Exam 3 Practice Questions 1. The price elasticity of demand is a measure of: a) how quickly a particular market reaches equilibrium. b) the change in supply associated with lower prices. c) the percent
ExamLearn.ie Costs of Production Costs of Production Fixed Costs = Costs that don't change as you increase output in the short, e.g. Rent Variable Costs = Costs that change as your output increases e.g.
CIE Economics A-level Topic 2: Price System and the Microeconomy c) Types of cost, revenue and profit, shortrun and long-run production Notes Short-run production function Fixed and variable factors of
Chapter 5 MULTIPLE-CHOICE QUESTIONS 1. The short run is defined as a period in which: a. the firm cannot change its output level b. all inputs are variable but technology is fixed c. input prices are fixed
Basic Cost Management Concepts M. En C. Eduardo Bustos Farías as 1 Objectives 1. Explain what is meant by the word "cost." 2. Distinguish among product costs, period costs,, and expenses. 3. Describe the
Lecture Notes for Facilities Design Spring 2003 Michael G. Kay Department of Industrial Engineering North Carolina State University Raleigh, NC 27695-7906 These notes are provided for the use of the students
ECON 202-501 Fall 2008 Xiaoyong Cao Final Exam Form A Instructions: The exam consists of 2 parts. Part I has 35 multiple choice problems. You need to fill the answers in the table given in Part II of the
WJEC (Wales) Economics A-level Microeconomics Topic 1: Costs, Revenue and Profits 1.1 Costs, revenues and profits Notes The difference between the short run and the long run In the short run, the scale
1 Chapter 1 1.1. Scarcity, Choice, Opportunity Cost Definition of Economics: Resources versus Wants Wants: more and better unlimited Versus Needs: essential limited Versus Demand: ability to pay + want
CHAPTER 8: THE COSTS OF PRODUCTION Introduction Now that we have examined consumer behavior in more detail, it is time to look at the decision making of the firm. Costs of production are important to determine
CHAPTER 8 Competitive Firms and Markets CHAPTER OUTLINE 8.1 Competition Price Taking Why the Firm s Demand Curve Is Horizontal Why We Study Competition 8.2 Profit Maximization Profit Two Steps to Maximizing
MICROECONOMICS CHAPTER 10A/23 PERFECT COMPETITION Professor Charles Fusi Learning Objectives Identify the characteristics of a perfectly competitive market structure Discuss the process by which a perfectly
Practice Test for Midterm 2 Econ 2010-200 Fall 2009 Instructor: Soojae Moon Please read carefully and choose the choice that best completes the statement or answers the question. Table 7-2 This table refers
UNIT 8 COST CONCEPTS AND ANALYSIS I Objectives After going through this unit, you should be able to: understand some of the cost concepts that are frequently used in the managerial decision making process;
1. An increase in aggregate demand would tend to result from A. an increase in tax rates. B. a decrease in consumer spending. C. a decrease in net export spending. D. an increase in business investment.
s in Competitive Markets WHAT IS A COMPETITIVE MARKET? A perfectly competitive market has the following characteristics: There are many buyers and sellers in the market. The goods offered by the various
Teaching about Market Structures Felix B. Kwan, Ph.D. Professor of Econ/Finance, Maryville University AP Econ Conference - FRB St. Louis June 17-19, 2015 Profits Foundational Concepts Some basic terms/concepts
Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is correct? A) Consumers have the ability to buy everything
The Costs of Production 1. Total revenue necessarily equals a. total output multiplied by the average cost of output. b. total output multiplied by sales price of output. c. (total output multiplied by
MICROECONOMICS II - REVIEW QUESTIONS I. What is a production function? How does a long-run production function differ from a short-run production function? A production function represents how inputs are
SIMON FRASER UNIVERSITY ECON 103 (2007-2) MIDTERM EXAM NAME Student # Tutorial # Multiple Choice Part II, A Part II, B Part III Total PART I. MULTIPLE CHOICE (56%, 1.75 points each). Answer on the bubble
Chapter 8 The Labor Market: Employment, Unemployment, and Wages Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. If the price of a factor
Micro Problem Set III WCC Fall 2014 A=True / B=False 15 Points 1) If MC is greater than AVC, AVC must be rising. 2) All combinations of capital and labor along a given isoquant cost the same amount. 3)
Principles of Economics Final Exam Name: Student ID: 1. In the absence of externalities, the "invisible hand" leads a competitive market to maximize (a) producer profit from that market. (b) total benefit
YOUR NAME Row Number ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION Prof. Bill Even Novermber 12, 2015 FORM 1 Directions 1. Fill in your scantron with your unique-id and the form number
Supply in a Competitive Market 8 Introduction 8 Chapter Outline 8.1 Market Structures and Perfect Competition in the Short Run 8.2 Profit Maximization in a Perfectly Competitive Market 8.3 Perfect Competition
Lesson-9 Elasticity of Supply and Demand Price Elasticity Businesses know that they face demand curves, but rarely do they know what these curves look like. Yet sometimes a business needs to have a good
Microeconomics 1. Suppose a firm in a perfectly competitive market produces and sells 8 units of output and has a marginal revenue of $8.00. What would be the firm s total revenue if it instead produced
ECON 21 Principles of Microeconomics (Summer 216) Monopoly Relevant readings from the textbook: Mankiw, Ch. 15 Monopoly Suggested problems from the textbook: Chapter 15 Questions for Review (Page 323):
Perfect Competition Michael J. Murray Slides and Images, Worth Publishers Inc. 8-1 Market Structure Analysis By observing a few industry characteristics, we can predict pricing and output behavior of the
Turgut Ozal University Department of Economics ECO 152 Spring 2014 Assist. Prof. Dr. Umut UNAL PART A - Definitions 1) Define these terms: Perfect competition Homogeneous products Total revenue Total cost
ECONOMICS 10-008 Dr. John Stewart Sept. 25, 2001 Exam 1 Detailed solution for one Form of the Midterm: The general question are the same for all forms but some questions differ in details so correct answer
Characteristics: Fragmented: Many small firms, none of which have market power Undifferentiated Products: Products that consumers perceive as being identical. Perfect Pricing Information: Consumers have
ECON 251 Exam 2 Pink Use the table below to answer the following four questions The table below shows Harry s total utility from consuming beer and wine. The price of beer is $2 per bottle. The price of
Introductory Microeconomics (ES10001) Exercise 6: Suggested Solutions 1. Match each lettered concept with the appropriate numbered phrase: (a) Input; (b) short run average variable cost (SAVC); (c) U-Shaped
C H A T E R 14 Firms in Competitive Markets R I N C I L E S O F Microeonomics N. Gregory Mankiw remium oweroint Slides by Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved
Chapter 2 Production Possibilities, Opportunity Cost, and Economic Growth CHAPTER SUMMARY The What, How and For Whom are introduced as the fundamental economic questions that must be addressed by all societies.
Sample Paper-05 (2016-17) Economics Class XII Time allowed: 3 hours Maximum Marks: 100 Answers 1. (b) How to produce. 2. (c) tea and coffee 3. (c) Contraction of demand. 4. PPC shift when (i) resources
CHAPTER 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Summary and Learning Objectives 13.1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive
Midterm #2 Exam Study uestions: (A subset of these questions/concepts will be on the exam) Chapter 5 - Elasticity Define rice elasticity of demand. What does it mean to say demand is highly elastic? What
1. Fill in the missing blanks ( XXXXXXXXXXX means that there is nothing to fill in this spot): Quantity Total utility Marginal utility 0 0 XXXXXXXXXXX XXXXXXXXXXX XXXXXXXXXXX 200 0 = 200 1 200 XXXXXXXXXXX
Chapter 01 The Fundamentals of Managerial Economics Multiple Choice Questions 1. The higher the interest rate: A. the greater the present value of a future amount. B. the smaller the present value of a
Fall 2012 ECO 211 Microeconomics Yellow Pages ANSWERS Unit 2 Mark Healy William Rainey Harper College E-Mail: firstname.lastname@example.org Office: J-262 Phone: 847-925-6352 Price Elasticity of Demand Calculate
Economics 001.01: Principles of Microeconomics Spring 01 Instructor: Robert Munk April, 01 Final Exam Exam Guidelines: The exam consists of 5 multiple choice questions. The exam is closed book and closed
Instructions: Econ 001: Midterm 2 (Dr. Stein) Answer Key Nov 13, 2007 This is a 60-minute examination. Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and label