Chapter 8

Terms and Concepts

 Economic Cost, Total Product (TP), Average Variable Cost, Explicit Costs, Marginal
Product, Average Total Cost, Implicit Costs, Average Product, Marginal Cost, Accounting
Profit, Law of Diminishing Returns, Economies of Scale, Normal Profit, Fixed Cost,
Diseconomies of Scale, Economic Profit, Variable Cost, Constant Returns to Scale, Short
Run, Total Cost, Minimum Efficient Scale, Long Run, Average Fixed Cost, Natural
Monopoly
This is a building block chapter. You ______ know and understand these concepts to do well
with the remainder of the course. It is very likely that you will perform poorly if you do not
make the effort to learn these core course concepts.

Most of this chapter is a set of definitions. I encourage you to you make notecards for these
terms.

You must know these equations for the next and final exam.

Total Revenue
the amount a firm receives for the sale of its output
¿¿
_____________
the market value of the inputs a firm uses in production
________________
¿¿
Which of the following companies are trying to maximize profit?
 Walmart
 Target
 Animal Shelter
 Homeless Shelter
 Food Bank
_____________________
input costs that require an outlay of money by the firm
Examples:
 Inputs
o Leather
o Oats
o Chocolate
o Computers
 Labor
 Rent
_______________________
input costs that do not require an outlay of money by the firm

This is your opportunity costs. You don’t have to pay any of these costs directly.

Example: You could have rented out your store space instead of having a coffee shop. The rent
you would have earned renting the store space is the implicit costs of running a coffee shop
instead.

_________________
total revenue minus total cost, including both explicit and implicit costs

__________________
total revenue minus total explicit cost

Notice that Economic profit is always less than accounting profit!

________________________
the relationship between the quantity of inputs used to make a good and the quantity of output
of that good

¿¿

_____________________
the increase in output that arises from an additional unit of input

____________________
the increase in output that arises from an additional unit of labor

____________________
the property whereby the marginal product of an input declines as the quantity of the input
increases

________________
costs that do not vary with the quantity of output produced

_________________
costs that vary with the quantity of output produced

__________________
total cost divided by the quantity of output
TC
Q
___________________
the increase in total cost that arises from an extra unit of production
MC= ( Δ TC
ΔQ )
______________
the property whereby long-run average total cost falls as the quantity of output increases

______________
the property whereby long-run average total cost rises as the quantity of output increases

_____________
the property whereby long-run average total cost stays the same as the quantity of output
changes

This chapter discusses many types of costs: opportunity cost, explicit costs, fixed cost, variable
cost, and average fixed cost. Fill in the type of cost that best completes each sentence.

In the pizza industry, the cost of the factory is a _______ only in the short run but not in the
long run.

___________ is always falling as the quantity of output increases.

A cost that depends on the quantity produced a ____________.

The term ___________ refers to all the things you must give up to taking some action.

The __________ refers to costs that involve direct monetary payment by the firm.

1. The equilibrium rent on office space has just increased by $500/month. Determine the
effects on accounting profit and economic profit if
 a. you rent your office space

b. you own your office space

2. Fill in the blank spaces of this table.

Q TVC TFC TC AFC AVC ATC MC

0 50 - - - -
1 10 10 60 10
2 30 80
3 16.67 20 36.67 30
4 100 150 12.50 37.50
5 150 30
6 210 260 8.33 35 43.33 60

3. A firm's average total cost is $60, its average variable cost is $30, and its total fixed cost
is $600. Its output is ___
 Labor
(workers Output (units per day) TFC TVC TC ATC
per day)

0 0
1 13
2 18
3 22
4 24
5 25
4. Sandra's Sweaters' production function is shown in the above table. Sandra rents three
knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. Please fill
in the chart. If Sandra produces 18 sweaters per day, what is her average total cost?

Labor (workers per Total product (hats

MPL
day) per day)
0 0 -
1 4
2 10
3 18
4 25
5 30

4. The above table shows the total product of producing baseball hats. At what level
of output does the marginal cost of baseball hats start to rise?

Output (T shirts Total cost Total variable cost

per hour) (dollars) (dollars)
4 42 22
5 50 30
6 60 40

5. The table above gives the cost of producing T-shirts. The total fixed cost is ________ and
the marginal cost of increasing production from 5 to 6 T-shirts is ________.
6. Which of the following is a variable cost?
a) Interest payments
b) Raw materials costs
c) Property taxes
d) All of the above are variable costs.
7. If an input is owned and used by a firm, then its
a) explicit cost is zero.
b) implicit cost is zero.
c) opportunity cost is zero.
d) economic cost is zero.
8. Which of the following short-run cost curves declines continuously?
a) Average total cost
b) Marginal cost
c) Average fixed cost
d) Average variable cost
9. One reason that a firm may experience increasing returns to scale is that greater levels
of output make it possible for the firm to
a) employ more specialized machinery.
b) obtain bulk purchase discounts.
c) employ a greater division of labor.
d) All of the above are correct.