All Flashcards
How does the Law of Diminishing Marginal Returns affect hiring decisions?
Firms will eventually see smaller output gains from each new worker, impacting optimal staffing.
How do economies of scale benefit large corporations?
Lower LRATC allows for competitive pricing and higher profit margins.
How does the shutdown rule guide a business owner's decision?
If P < AVC, the firm should temporarily cease production to minimize losses.
How does free entry and exit affect long-run profits in perfect competition?
It drives economic profits to zero as firms enter or exit in response to market conditions.
A local bakery is considering hiring a new baker. How should they use the concept of marginal product to make their decision?
They should compare the additional revenue generated by the new baker's output with the cost of hiring the baker. If the marginal product of labor is high enough to cover the cost, they should hire the baker.
A tech startup is experiencing rapid growth. How might diseconomies of scale affect their operations?
As the company grows, coordination and communication may become more difficult, leading to inefficiencies and higher average costs.
A small farm is deciding whether to stay open for another season. How should they use the shutdown rule to make their decision?
If the market price of their crops is less than their average variable cost, they should shut down production in the short run to minimize losses.
A clothing manufacturer is deciding whether to invest in new machinery. How should they consider the difference between accounting and economic profit?
They should consider both the explicit costs (e.g., the price of the machinery) and the implicit costs (e.g., the opportunity cost of investing in the machinery instead of other ventures) to determine whether the investment is economically profitable.
A restaurant owner is trying to decide how many waiters to hire. How should they use the profit-maximizing rule to make their decision?
They should hire waiters until the marginal revenue generated by each additional waiter equals the marginal cost of hiring that waiter.
How does understanding cost curves help a manager make informed decisions about production levels?
By analyzing the relationships between MC, ATC, and AVC, a manager can determine the optimal output level to minimize costs and maximize profits.
What is Total Product (TP)?
Total output produced by a firm.
What is Marginal Product (MP)?
Additional output from one more unit of input.
What is Average Product (AP)?
Total product divided by the quantity of input (TP/Q).
What are Fixed Costs (FC)?
Costs that do not vary with output.
What are Variable Costs (VC)?
Costs that change with output.
What is Total Cost (TC)?
Sum of fixed and variable costs: TC = FC + VC.
What is Average Total Cost (ATC)?
Total cost divided by quantity: ATC = TC / Q.
What is Average Fixed Cost (AFC)?
Fixed cost divided by quantity: AFC = FC / Q.
What is Average Variable Cost (AVC)?
Variable cost divided by quantity: AVC = VC / Q.
What is Marginal Cost (MC)?
Additional cost of producing one more unit.
What is economic profit?
Total revenue minus explicit and implicit costs.
What is accounting profit?
Total revenue minus explicit costs.
Define marginal revenue (MR).
Additional revenue from selling one more unit.
What are the key differences between the short run and the long run in production?
In the short run, at least one input is fixed, while in the long run, all inputs are variable.
Compare and contrast accounting profit and economic profit.
Accounting profit only considers explicit costs, while economic profit considers both explicit and implicit costs (opportunity costs).
Differentiate between economies of scale and diseconomies of scale.
Economies of scale occur when LRATC decreases as output increases, while diseconomies of scale occur when LRATC increases as output increases.
What is the difference between average fixed cost (AFC) and average variable cost (AVC)?
Average fixed cost (AFC) is fixed cost divided by quantity, while average variable cost (AVC) is variable cost divided by quantity.
What is the difference between marginal cost (MC) and average total cost (ATC)?
Marginal cost (MC) is the additional cost of producing one more unit, while average total cost (ATC) is the total cost divided by quantity.
What is the difference between increasing returns to scale and decreasing returns to scale?
Increasing returns to scale occur when output increases by a larger proportion than the increase in inputs, while decreasing returns to scale occur when output increases by a smaller proportion than the increase in inputs.
What is the difference between normal profit and economic profit?
Normal profit is the minimum level of profit needed to keep a firm in the industry, while economic profit is the profit above and beyond normal profit.
What is the difference between a price taker and a price maker?
A price taker is a firm that has no control over the market price, while a price maker is a firm that has some control over the market price.
What is the difference between explicit costs and implicit costs?
Explicit costs are the direct, out-of-pocket costs of production, while implicit costs are the opportunity costs of using resources that the firm already owns.
What is the difference between the short-run shutdown rule and the long-run exit decision?
The short-run shutdown rule states that a firm should shut down if price is less than average variable cost, while the long-run exit decision states that a firm should exit the market if it is incurring losses.