ECON 200 Lecture 8: The Costs of Production

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mauvecricket694

7 Oct 2016

School

University of Arizona

Department

Economics

Course

ECON 200

Professor

Ryan Johnson

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ECON 200 Full Course Notes

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The economy is made up of thousands of firms that produce the goods and services you enjoy every day. Industrial organization: the study of how firms" decisions about prices and quantities depend of the market conditions they face. All firms incur costs as they make the goods and services that they sell. Economists normally assume that the goal of a firm is to maximize profit. Total revenue: the amount that the firm receives for the sale of its output. Total cost: the amount that the firm pays to buy inputs. The objective is to make the profit as large as possible. As a reminder: opportunity cost of an item refers to all those things that must be forgone to acquire that item. Explicit costs: costs that require the firm to pay out some money. Implicit costs: do not require a cash outlay. Total cost of the business is the sum of the explicit and implicit costs.

Related Questions

5. Economic profit is equal to

a. total revenue minus the explicit cost of producing goods and services.

b. total revenue minus the opportunity cost of producing goods and services.

c. total revenue minus the accounting cost of producing goods and services.

d. average revenue minus the average cost of producing the last unit of a good or service.

6. Accounting profit is equal to

a. marginal revenue minus marginal cost.

b. total revenue minus the explicit cost of producing goods and services.

c. total revenue minus the opportunity cost of producing goods and services.

d. average revenue minus the average cost of producing the last unit of a good or service.

7. Economic profit

a. will never exceed the accounting profit.

b. is most often equal to accounting profit

c. is always at least as large as accounting profit.

d. is a less complete measure of profitability than accounting profit

8. Which of the following expressions is correct?

a. accounting profit = total revenue - explicit costs

b. economic profit = total revenue - implicit costs

c. economic profit = total revenue - explicit costs

d. Both a and b are correct

Scenario 13-2:

Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3% interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50. Also during the first year, the cookie business incurred costs that required outlays of money amounting to $9,000.

9. Zach's accounting profit for the year was

10. Zach's economic profit for the year was

Scenario 14-1:

As part of an estate settlement, Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per

11. At the end of the first year of operating her new business, Mary's accountant reported an accounting profit of $150,000. What was Mary's economic profit?

If a monopolist or a perfectly competitive firm is producing at a break-even point, then:
i. average revenue is equal to average variable cost
ii. average revenue is equal to average total cost
iii. total revenue is equal to total variable cost
iv. total revenue is equal to total cost

iii

i and iii

ii and iv

A natural monopoly, such as a local electricity provider, is the result of:
i. a firm owning or controlling a key input used in the production process
ii. economies of scale existing over a wide range of output
iii. long-run average total costs declining continuously as output increases
iv. long-run total costs declining continuously as output increases

What do economies of scale, the exclusive ownership of essential raw materials used in the production process, and patents have in common?

they are all barriers to entry

they all help explain why a monopolists demand and marginal revenue curves are identical

they must all be present before a monopolist may practice price discrimination

they all help explain why a firms short run average total cost curve is U-shaped

#10

The principle that a firm should produce up to the point where the marginal revenue (MR) from the sale of an extra unit of output is equal to the marginal cost (MC) of producing the extra unit applies:

to both perfectly competitive firms and monopolies

only to monopolies

only to perfectly competitive firms

only to firms that can employ discriminatory pricing strategies

#11

A monopoly is producing a level of output such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $8 per unit and is incurring average variable costs of $5 per unit and average total costs of $10 per unit. Given this information, it may be concluded that the firm:

is operating at maximum total profit

is operating at a loss that could be reduced by shutting down

is operating at a profit that could be increased by producing more output

is operating at a loss that is less than the loss incurred by shutting down

#12

Suppose the demand function for a profit maximizing monopolists good is P = 120 - 0.2Q, its total cost function is TC = 40 + 4Q + Q2, and its marginal cost function is MC = 4 + 2Q. If the firm uses a uniform pricing strategy, then rounded to the nearest unit of output and to the nearest dollar the firm will:

produce 48 units of output, charge a price of $110, and earn a total profit of $5280

produce 48 units of output, charge a price of $110, and earn a total profit of $2744

produce 52 units of output, charge a price of $134, and earn a total profit of $5322

produce 52 units of output, charge a price of $134, and earn a total profit of $4016

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Question:

Evaluate the following statement:

In the short-run, information about a perfectly competitive firm's fixed costs is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Answer:

The objective of a firm is to maximize profits. In determining output, the firm may be subject to two constraints: costs of production and consumer demand. The price that a perfectly competitive firm may sell its products, is determined by consumer demand. Production costs are determined by the technology used. Profits are the difference between total revenues and total costs. Pertaining to short-run profit maximization, firms maximize profits by choosing the output level where its marginal revenue equals its marginal cost.

Farnham, P. G. (2014). Economics for Managers (3rd Ed.).

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ECON 200 Lecture 8: The Costs of Production

ECON 200 Full Course Notes

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