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EC120 Lecture Notes - Lecture 7: Average Variable Cost, Average Cost, Production Function

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School
WLU
Department
Economics
Course
EC120
Professor
Ken Jackson

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EC120 Full Course Notes
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EC120 Full Course Notes
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Document Summary

Economic costs are not equal to accounting costs. Economic profit not equal to accounting profit. Assumption - firms act to maximize economic profit (fine even if economic profit is zero) Economic profit= revenue minus the opportunity cost of producing goods and services. If a firm produces nothing, variable costs will be zero. Production function - the relationship between the quantity of inputs used to make a good and the quantity of output of that good. Marginal product- the increase in output that arises from an additional unit of an input. Consider the marginal change at a point on the production function. Equal to the slope of the production function. Marginal product of labour, or marginal product of variable inputs. Equivalent to the (mathematical approach) derivative of the production function with respect to the specific input. Fixed costs - same regardless of production, do not change no matter what you produce. Fixed costs in the long run are always zero.

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Related Questions

Question 1

  1. If economic profits are zero

    accounting profits is less than the cost of capital.

    accounting profit is just covering the cost of capital.

    the cost of capital is negative.

    the entrepreneur should go to his/her next best alternative.

3 points

Question 2

  1. Markets provide

    information.

    prices.

    incentives.

    all of these choices.

3 points

Question 3

  1. The entrepreneur is always searching for

    positive profit.

    normal profit.

    accounting profit.

    economic profit.

3 points

Question 4

  1. Social regulations can create

    a more competitive market place.

    network externalities.

    a lower HHI.

    barriers to entry.

3 points

Question 5

  1. According to economic theory, profits are maximized where

    total revenue equals total cost.

    marginal revenue equals marginal cost.

    price and average cost are equal.

    where marginal product and average cost are equal.

3 points

Question 6

  1. Brand names help

    create commodities.

    maintain market power.

    create competition.

    keep economic profits at zero.

3 points

Question 7

  1. Entry of new firms causes

    accounting profits to go to zero.

    market share to grown.

    economic profits to go to zero.

    total revenue to be maximized.

3 points

Question 8

  1. Fixed costs

    do not vary with output

    vary with output

    do not vary with price

    vary with price

3 points

Question 9

  1. Variable costs

    do not vary with price.

    do not vary with output.

    vary with price.

    vary with output.

3 points

Question 10

  1. Value maximization means

    that managers make decision so as to increase the long-run market value of the financial claims on the firm.

    that a firm should make products that have the highest price.

    that managers make decision so as to increase the short-run market value of the financial claims on the firm.

    all of these choices.

3 points

Question 11

  1. A manager can determine if her product is viewed as a normal good or an inferior good by considering

    price elasticity.

    cross elasticity.

    income elasticity.

    advertising elasticity.

3 points

Question 12

  1. If demand is perfectly elastic,

    the smallest increase in price will cause quantity demanded to fall to zero.

    the smallest increase in price will cause demand to fall to zero.

    the smallest increase in price will cause quantity demanded to fall.

    the smallest increase in price will cause demand to fall.

3 points

Question 13

  1. If demand is perfectly elastic, then

    demand and price are inversely related.

    quantity demanded and price are inversely related.

    the demand curve is a vertical line.

    the demand curve is a horizontal line.

3 points

Question 14

  1. If price elasticity is 3.25 then

    for every one percent change in price, there will be a 3.25 percent change in quantity demanded.

    for every one percent change in price, there will be a 3.25 percent change in demand.

    for every one percent change in price, there will be a 32.5 percent change in quantity demanded.

    for every one percent change in price, there will be a .0325 percent change in quantity demanded.

3 points

Question 15

  1. If price elasticity is 3.25, then demand is

    inelastic.

    elastic.

    unitary.

    negative.

1-7 True or False

1) In the short run, a perfectly competitive firm can earn positive, zero, or negative profit depending on the market price of the firm's output.

2)In the model of the perfectly competitive firm, the firm's fixed costs are equal to its implicit costs of production.

3)Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output. In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

4)Assume that at the current level of output, price equals marginal revenue, but is less than average total cost. So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

5)The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

6)Barriers to entry serve to limit the number of firms that operate in a particular market and, as 11) such, reduce the amount of total profit earned in the market.

7)In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.

14-17 Multiple Choice

14) Marginal revenue is equal to:
A) the change in P x Q due to a one unit change in output. B) the change in quantity divided by the change in price.

C) the change in price divided by the change in output. D) price, but only if the firm is a price searcher.

15) In order to maximize its profits, a price-taking firm should produce the level of output at which:

A) marginal revenue = marginal cost. B) total revenue = total cost.

C) variable revenue = variable cost. D) average revenue = average cost.

16) Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:

A) cannot be determined with the information given. B) no change in the firm's economic profit.
C) a decrease in the firm's economic profit. D) an increase in the firm's economic profit.

17) Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:

A) incurring an economic loss. B) earning a positive economic profit.

C) earning economic profit = 0. D) breaking even.

The law of eventually diminishing marginal returns: (Points : 1)

a. states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns.
b. is a mathematical theorem that can be logically proved or disproved
c. is the rate at which one input may be substituted for another input in the production process
d. None of the above

The marginal product is defined as: (Points : 1)
a. the ratio of total output to the amount of the variable input used in producing the output
b. the incremental change in total output that can be produced by the use of one more unit of the variable input in the production process
c. the percentage change in output resulting from a given percentage change in the amount of the variable input X employed in the production process with Y
d. None of the above

The rate at which one input X may be substituted for another input Y in a production process, while total output remains constant, is: (Points : 1)
a. the slope of the isoquant curve
b. the marginal rate of technical substitution

c. equal to MPx/MPy


d. all of the above
e. none of the above

Marginal revenue product is: (Points : 1)
a. defined as the amount that an additional unit of the variable input adds to the total revenue
b. equal to the marginal factor cost of the variable factor times the marginal revenue resulting from the increase in output obtained
c. equal to the marginal product of the variable factor times the marginal product resulting from the increase in output obtained
d. a and b
e. a and c

Marginal factor cost is defined as the amount that an additional unit of the variable unit of the variable input adds to ____________. (Points : 1)
a. marginal cost
b. variable cost
c. marginal rate of technical substitution
d. total cost
e. none of the above

In the Cobb-Douglas production function Q=aL^?1.K^?2 ______________. (Points : 1)
a. the marginal product of labor (L) is equal to ?1
b. the average product of labor (L) is equal to ?2
c. if the amount of labor input (L) is increased by 1 percent, then output will increase by ?1 percent
d. a and b
e. a and c

The short-run cost function is: (Points : 1)
a. where all inputs to the production process are available
b. relevant to decisions in which one or more inputs to the production process are fixed
c. not relevant to optimal pricing and production output decision facilities
d. crucial in making optimal investment decisions in new production facilities
e. none of the above

Theoretically, in a long-run cost function: (Points : 1)
a. all inputs are fixed
b. all inputs are considered variable
c. some inputs are always fixed
d. capital and labor are always combined in fixed proportions

A linear total cost function implies that: (Points : 1)
a. marginal costs are constant as output increases
b. average total costs are continually decreasing as output increases
c. a and b
d. none of the above