ECON 1 Lecture Notes - Lecture 14: Fixed Cost, Farmer Jack, Marginal Product

114 views3 pages

rosewoodchuck40

3 Jun 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Chapters 13 and 14: Costs and Profit Maximization Under Competition

- We assue that the fir’s goals is to aiize profit

o Profit = total revenue – total cost

o Total revenue – the amount a firm receives from the sales of its output

o Total cost – the market value of the inputs a firm uses in production

- Explicit costs – require an outlay of money

o Ex: paying wages to workers

- Implicit costs – do not require a cash outlay

o E: the opportuit ost of the ower’s tie

- Remember one of the Ten Principles: the cost of something is what you give up to get it

- This is true whether the osts are ipliit or epliit. Both atter for firs’ deisios

- Ex: costs – explicit vs implicit

o You need $100,000 to start your business. The interest rate is 5%

o Case 1: borrow $100,000

o Explicit cost = $5000 interest on loan

o Case 2: use $40,000 of your savings, borrow the other $60,000. Assume your savings account pays

5% interest

o Explicit cost = $3000 (5%) interest on the loan

o Implicit cost = $2000 (5%) foregone interest you could have earned on your $40,000

o In both cases, the total (explicit + implicit) costs are $5000

- Accounting profit – total revenue minus total explicit costs

- Economic profit – total revenue minus total costs (including explicit and implicit costs)

- Accounting profit ignores ipliit osts, so it’s higher tha eooi profit

- Ex: economic profit vs accounting profit

o The equilibrium rent on office space has just increased by $500/month

o Determine the effects on accounting profit and economic profit if

▪ A) you rent your office space

• Explicit costs increase $500/month

• Accounting profit and economic profit each fall $500/month

▪ B) you own your office space

• Explicit costs do not change, so accounting profit does not change

• Implicit costs increase $500/month (opportunity cost of using your space instead of

renting it), so economic profit falls by $500/month

- Production function – shows the relationship between the quantity of inputs used to produce a good and

the quantity of output of that good

o Can be represented by a table, equation, or a graph

o Ex: farmer jack grows wheat, has 5 acres of land, he can hire as many workers as he wants

o If jack hires one more worker, his output rises by the

marginal product of labor

o Marginal product of any input – the increase in output

arising from an additional unit of that input, holding all other

inputs constant

▪ Notation: ∆ delta = hage i…

▪ Examples: ∆Q – change in output, ∆L – change in labor

▪ Marginal product of labor (MPL): (∆Q/∆L)

find more resources at oneclass.com

Unlock document

This preview shows page 1 of the document.
Unlock all 3 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Chapters 13 and 14: costs and profit maximization under competition. Explicit costs require an outlay of money: ex: paying wages to workers. Implicit costs do not require a cash outlay: e(cid:454): the opportu(cid:374)it(cid:455) (cid:272)ost of the ow(cid:374)er"s ti(cid:373)e. Remember one of the ten principles: the cost of something is what you give up to get it. This is true whether the (cid:272)osts are i(cid:373)pli(cid:272)it or e(cid:454)pli(cid:272)it. Ex: costs explicit vs implicit: you need ,000 to start your business. The interest rate is 5: case 1: borrow ,000, explicit cost = interest on loan, case 2: use ,000 of your savings, borrow the other ,000. 5% interest: explicit cost = (5%) interest on the loan. Implicit cost = (5%) foregone interest you could have earned on your ,000. In both cases, the total (explicit + implicit) costs are . Accounting profit total revenue minus total explicit costs.

Related Questions

Explain implicit and explicit costs as applied to profit. Include examples to support your explanation. 2. Explain âTotal costs increases as output expands. But the rate of cost increase varies.â Explain with an example. 2. Explain, âFor perfectly competitive firms, profits are maximized at the rate of output where price equals marginal costâ Remember profit is considered a cost. Explain with an example. 3. Explain why supply is affected by: 1. The price of factor inputs-labor, capital, resources. 2. Technology â for example computers and robots. 3. Expectations- what is going to happen with the demand for the product thus supply. Ex. a recession 4. Taxes and subsidies-include examples. 5. If one firm making and selling X product and is earning excessive profits how will the eventually effect the market price and the supply of the product? Page 519

Question 3

We saw in class that the same good can fall in different categories (public/private/club/common resource) depending on circumstances. An example of such a good would be watching a movie at the theater. If a lot of people want to watch it, the movie is a _________. If very few people want to watch it (to the point where a room could not even be filled), the movie is likely to be a _______.

A. a common resource; a public good

B. a public good; a common resource

C. a private good; a club good

D. a club good; a private good

3 points

Question 4

Which of the following statements about the free-rider problem is not true?

A. Individuals have an incentive to free-ride when the good is not excludable.

B. The kinds of goods for which the free rider problem arises are common resources and public good.

C. Markets for goods for which there is a free-rider problem are inefficient because not enough of the good is produced.

D. Goods for which the free-rider problem exists tend to be over provided relative to what would be optimal.

4 points

Question 5

To achieve the efficient provision of public goods, the

A. market should be allowed to operate without government intervention.

B. government must limit the provision of those goods.

C. government must tax producers of those goods.

D. government must either provide those goods or subsidize their production.

3 points

Question 6

Which of the following statements about public goods is not true?

A. Because people cannot be excluded from their consumption and thus have no incentive to pay for them, public goods are underprovided by the market.

B. Efficiency requires that the government provide or fund (subsidize) the provision of all public goods.

C. Efficiency requires that the government provide or fund only the public goods that create more benefits than costs to society.

D. In reality, it is hard to provide public goods efficiently.

3 points

Question 7

Public goods must be provided by the government as the market on its own will fail to provide them. However, even with government provision it is very hard to achieve efficiency. Why?

A. In reality, it is very hard (if not impossible) to accurately estimate the benefits of providing a public good.

B. A. In reality, there can be overruns in the cost of providing the public good.

C. Government decisions about which public goods to provide can be influenced by lobbying by interest groups.

D. All of the above are true.

4 points

Question 8

Which of the following is not a common resource?

A. congested roads

B. clean water

C. wild life, which hunters want to hunt and others want to view.

D. a fireworks display.

3 points

Question 9

Many species of animals must be protected by law to keep them from extinction. Why are cows not one of these endangered species even though there is such a high demand for beef?

A. Cows reproduce at a high rate and have adapted well to their environment.

B. Public policies protect cows from predators and diseases.

C. Cows are privately owned (private goods), whereas many endangered species are owned by no one (common resources).

D.There is a natural ecological balance between the birth rate of cows and human consumption.

3 points

Question 10

Which of the following statements about common resources is not true?

A. Due to the free-rider problem, common resources tend to be overused.

B. Because there is rivalry in the consumption of common resources, whenever one person uses a common resource it is imposing a negative externality on others who might also want to use it.

C. There are no private solutions to the management of common resources.

D. One of the solutions that ensures that common resources are properly managed is their privatization.

3 points

Question 11

In our analysis of the firmâs behavior and goals, when we talk about cost, we include _________, and when we talk about profit, we mean ________.

A. Explicit costs only; economic profit

B. Implicit costs only; economic profit

C. Implicit costs only; accounting profit

D. Explicit + implicit costs; economic profit

E. Explicit + implicit costs; accounting profit

3 points

Question 12

One of the differences between explicit and implicit costs is that

A. explicit costs must be greater than implicit costs.

B. explicit costs do not require a direct monetary outlay, whereas implicit costs do.

C. implicit costs do not require a direct monetary outlay, whereas explicit costs do.

D. implicit costs must be greater than explicit costs.

3 points

Question 13

Which of the following is FALSE:

A. If accounting profit is zero, then economic profit is negative

B. Economic profit takes cost the opportunity cost of time and capital into account

C. Economic Profit = Accounting Profit + Implicit Cost

D. Economic Profit = Accounting Profit â Implicit Cost

3 points

Question 14

Which of the following is an example of an implicit cost?

(i) the owner of a firm forgoing an opportunity to earn a large salary working in Wall Street

(ii) interest paid on the firm's debt

(iii) rent paid by the firm to lease office space

A. (ii) and (iii) only

B. (i) and (iii) only

C. (i) only

D. (iii) only

3 points

sapphirekangaroo316

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

ECON 1 Lecture Notes - Lecture 14: Fixed Cost, Farmer Jack, Marginal Product

Document Summary

Get access

Related Documents

ECON 1 Lecture Notes - Lecture 15: Sunk Costs, Decision Rule, Perfect Competition

ECON 1 Study Guide - Midterm Guide: Absolute Advantage, Fiscal Policy, Opportunity Cost

ECO101H1 Lecture Notes - Lecture 7: Production Function, Opportunity Cost, Marginal Product

Related Questions