Deck 11: Production and Cost Analysis I

Question 1

How does accounting profit differ from economic profit? Explain why accounting profit is more useful for paying your taxes while economic profit is more useful for deciding whether you should continue to stay in business. Give an example of an implicit cost and an example of implicit revenue.

Answer 1

Both measure profit as revenues less costs. However, economic profits include explicit and implicit revenues and costs in their calculations whereas accounting profit only includes explicit revenues and costs. Accounting profit is used by the taxing authorities because it is more easily measured, but economic profit is more appropriate for deciding whether or not to stay in business because it includes all relevant costs.
Implicit costs would include the opportunity cost of the factors of production that the owner supplies to his firm (e.g. his own labor). Implicit revenue would include an increase in the value of assets owned by the firm.

Question 2

Define a firm and discuss its roles in the economy.

Answer 2

A firm is an economic institution that transforms factors of production into goods and services. Its roles in the economy are: (1) to organize factors of production; (2) to produce goods and services; and (3) to sell produced goods and services to individuals, businesses, and governments.

Question 3

What is the law of diminishing marginal productivity?

Answer 3

The law of diminishing marginal productivity states that as more and more of a variable input is added to an existing fixed input, eventually the additional output one gets from that additional unit of input is going to fall.

Question 4

Why do most firms operate at output levels where there is diminishing marginal productivity?

Question 5

What are the formulas for the following cost concepts: average total cost, average fixed cost, average variable cost, and marginal cost?

Question 6

Explain why the ATC and AVC curves get closer and closer together as output increases.

Question 7

Give the definition of fixed cost. What sorts of things might be included in fixed cost? Do fixed costs exist in the long run?

Question 8

What are the definitions of the following cost concepts: fixed costs, variable costs, and total cost?

Question 9

Give the definition of marginal product and average product and explain why if the marginal product is smaller than the average product, the average product must be decreasing.

Question 10

Why are the MC and AVC curves U-shaped?

Question 11

Define each of the following cost concepts: fixed costs, variable costs, and total cost and give examples of each. Do they exist in both the short run and the long run?

Question 12

Explain the relationship between marginal cost (MC) and average total cost (ATC).

Question 13

Define variable cost. What sorts of things might be included in variable cost? Do variable costs exist in the long run?

Question 14

What is the distinction between the microeconomic short run and the microeconomic long run? How do these definitions relate to specific periods of calendar time?

Question 15

What is the law of diminishing marginal productivity? Why does it apply only to the short-run?

Question 16

Why does the marginal cost curve always cut the average cost curve at the lowest point on the AC curve?

Question 17

Distinguish between the following three phases of production: increasing marginal productivity, diminishing marginal productivity and diminishing absolute productivity.

Question 18

What are the formulas for the following cost concepts: average total cost, average fixed cost, average variable cost and marginal cost? Explain why the ATC and AVC curves get closer together as output increases.

Question 19

In which part of the production function (increasing marginal productivity, diminishing marginal productivity, or diminishing absolute productivity) is a firm most likely to operate? Explain.

Question 20

How is accounting profit different from economic profit? How are they the same?

Question 21

Why does the minimum point of the AVC curve always occur at a lower output level than that at which the ATC curve has its minimum?

Question 22

Imagine that you are currently a college student working at a part time job. You work 15 hours per week as a taco specialist at TACOS! TACOS! TACOS! and earn $8 per hour. One day you realize you're tired of smelling like refried beans all the time and begin thinking about starting your own business. After doing some investigation you decide to spend 15 hours per week running a photocopy service in your dorm. You have determined the following as likely projected expenses and revenues for your first four weeks:
Revenue: $800 (8,000 copies sold at $.10 per copy)
Costs: $400 for photocopy machine rental, $80 for paper (8,000 pages at $.01 per page)
Using this information you decide to start the business. Did you make a wise decision?

Question 23

Draw and correctly label a typical set of AFC, ATC, AVC, and MC cost curves.

Question 24

The diagram below shows the production function for Clean-Like-New car wash business. (a) Compute the total product, marginal product, and the average product values in the following table: (b) Where does increasing marginal productivity occur?
(c) Where does diminishing marginal productivity occur?
(d) Where does diminishing absolute productivity occur?

Question 25

Demonstrate graphically and explain verbally why the MC curve always goes through the minimum point of the AVC curve.

Question 26

You are given that the total cost of producing 10 units of output is $100 and the fixed costs are $20. Calculate VC, ATC, AFC, and AVC.

Question 27

To make sure that you understand the relationships between all of the cost concepts, fill in the missing values in the table below. NOTE: Use whole numbers for all values except ATC.

Question 28

The diagram was intended to illustrate the MC and AVC curves that correspond to each other. Explain why the diagram below is incorrect.

Question 29

(a) Calculate marginal costs, total costs, average fixed costs, average variable costs and average total costs, given the following table. Costs are $100 when there is no production. Round off to the nearest whole number.
(b) Between what levels of output is there increasing marginal productivity?
(c) If labor were the only input to this production process, between what levels of output is the marginal product of labor falling?

Question 30

The diagram was intended to illustrate the MP and AP curves that correspond to each other. Explain why the diagram below is incorrect.

Question 31

You are given that the average variable cost of producing 25 units of output is $4 and the total cost is $200. Calculate VC, FC, ATC, and AFC.

Question 32

Congratulations! You have just been promoted to a new position at the Tootsie Roll Company. In your new position, you have been asked by the accounting department to provide them with some cost data. The basis for your report is a table that was begun by your predecessor. Your task is to fill in the missing values in the table below:

Question 33

You have been hired by the Tootsie Roll Company to analyze their production process. Your predecessor in the position left you with the following table: (NOTE: Marginal product represents changes between numbers of workers. Therefore, leave the first row blank in the "Marginal Product" column and put the marginal product from 0 workers to 1 worker in the second row of that column.)
(a) Fill in the blank values in the table above.
(b) Do the values in the table represent short-run or long-run production relationships? Explain.
(c) Are these production values consistent with the law of diminishing marginal productivity? Explain.
(Extra Credit: Between what levels of output is the firm most likely to operate? Explain your answer.)

Question 34

(a) Draw a graph of a typical production function. Your curve should have the proper shape for a production function that has an increasing marginal productivity range, a diminishing marginal productivity range, and a diminishing absolute productivity range. Indicate with dashed vertical lines the level of variable input (labor) at which the transition is made from increasing to diminishing marginal productivity, and the level of variable input (labor) at which the transition is made from diminishing marginal productivity to diminishing absolute productivity.
(b) Directly beneath your production function diagram, draw a diagram with average product and marginal product curves. The horizontal axis of this diagram should be aligned with and use the same scale as the horizontal axis of your production function diagram. Use the reference lines (dashed lines) you drew on your production function graph to properly locate the appropriate points on your marginal product curve.