ECON 101 Lecture Notes - Lecture 20: Diminishing Returns, Marginal Product, Opportunity Cost

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9 Apr 2015

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Econ 101 - lecture #20 - firms and profit. Firms try to maximize their economic profits: do that by analyzing output and input levels. Total revenue - total explicit costs - total implicit costs. Implicit cost are potential benefits that were sacrificed to perform a certain action. In contrast, accounting profit = total revenue - explicit costs. Because implicit costs are usually positive, economic profit is often smaller than accounting profits. All firm decisions are based on analysis on profits. Certain decision would be approved if economic profit is greater than 0. If the profit is 0, people would be indifferent about the decision. Pete earns by driving a truck; it costs him to do so. If he does not do that, he could rent the car out and earn by working for other trucking companies. Economic profit = total revenue - total explicit cost - total implicit cost.

Related Questions

26. To the economist total cost includes

A. explicit and implicit costs.

B neither implicit nor explicit costs.

C. implicit, but not explicit, costs.

D. explicit, but not implicit, costs.

27. Accounting profits are typically

A. greater than economic profits because the former do not take explicit costs into account

B. equal to economic profits because accounting costs include all opportunity costs.

C. smaller than economic profits because the former do not take implicit costs into account.

D. greater than economic profits because the former do not take implicit costs into account.

28. Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were

A. $100,000 and its economic profits were $0.

B. $200,000 and its economic profits were $0.

C. $100,000 and its economic profits were $100,000.

D. $0 and its economic loss was $200,000.

29. The basic difference between the short run and the long run is that

A. all costs are fixed in the short run, but all costs are variable in the long run.

B. the law of diminishing returns applies in the long run but not in the short run.

C. at least one resource is fixed in the short run, while all resources are variable in the long run.

D. economies of scale may be present in the short run but not in the long run.

30. The law of diminishing returns indicates that

A. as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.

B. because of economies and diseconomies of scale, a competitive firm's long-run average total cost curve will be U-shaped.

C. the demand for goods produced by purely competitive industries is downsloping.

D. beyond some point, the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction.

sapphirecrow883

The following questions address some of the price and output decisions faced by firms other than those found in perfect competition. Some numbers may be rounded.

Table 1

Output	Average Fixed cost	Average Variable Cost	Average Total Cost	Marginal Cost	Price	Total Revenue	Marginal Revenue
0					$ 345.00
1	$ 180.00	$ 135.00	$ 315.00		$ 300.00
2	$ 90.00	$ 127.50	$ 217.50		$ 249.00
3	$ 60.00	$ 120.00	$ 180.00		$ 213.00
4	$ 45.00	$ 112.50	$ 157.50		$ 189.00
5	$ 36.00	$ 111.00	$ 147.00		$ 165.00
6	$ 30.00	$ 112.50	$ 142.50		$ 144.00
7	$ 25.71	$ 115.70	$ 141.41		$ 126.00
8	$ 22.50	$ 121.90	$ 144.40		$ 111.00
9	$ 20.00	$ 130.00	$ 150.00		$ 99.00
10	$ 18.00	$ 139.50	$ 157.50		$ 87.00

Questions:

Complete Table 1. Summarize your calculations and use Microsoft Excel.
Using Excel, draw one graph showing average fixed costs, average variable costs, average total costs, marginal revenue, and marginal costs.
Using the data in the table and on your graph, what is the profit maximizing, or loss minimizing level of output? Explain and justify your answers.
What is a normal profit? What is an economic profit? Explain your answer using examples. Are normal profits being earned in this example? Are economic profits present for this firm in this example? Explain your answers.
Given the data in the table and the graph, how could you determine or identify the optimal plant size?
What is the difference between explicit and implicit cost? Explain your answers.
How would we determine if a cost is a fixed cost or a variable cost?

Present your analysis in Microsoft Excel format. Enter non-numerical responses in the same worksheet using textboxes. If you want to learn how to use Microsoft Excel to create curves, refer to the Microsoft Excel tutorials.

sangriacattle825

A. A competitive firm

can consider only its location in setting the price.
must base its competitive price on product differentiation.
has the ability to set its own price.
must accept the price determined by the intersection of the market supply and demand curves.
has no supply curve.

B. If a firm is making an economic profit, then

the factors of production are being paid their opportunity costs.
there will be no change in the number of firms if the industry is perfectly competitive.
the factors of production are being paid less than their opportunity costs.
the factors of production are being paid more than their opportunity costs.
the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

marginal revenue is greater than price.
the elasticity of demand is constant.
marginal revenue decreases when the price decreases.
marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

shut down because economic profits are negative.
continue to produce as long as P > AVC.
continue to produce because accounting profits are positive.
set a higher price for its output.
set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

the marginal revenue curve.
perfectly inelastic.
always equal to marginal cost.
the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

monopolistic
oligopolistic
monopolistically competitive
perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

total revenue will fall if the price increases.
total revenue will be unchanged if the price increases.
total revenue will rise if the price increases.
the total supply will increase by an equal amount if demand increases.
the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

monopoly.
perfect competition.
theories of consumer behavior.
imperfect competition.
the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

perfect competition
monopolistic competition
oligopoly
monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

economic profits are zero.
TR > TC.
TR < TC.
P = AVC.
normal profits are zero.

brownlouse308

ECON 101 Lecture Notes - Lecture 20: Diminishing Returns, Marginal Product, Opportunity Cost

ECON 101 Full Course Notes

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