Questions On Economics

Submitted By brendanmurphy4
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1. The relationship between a firm's total revenue, profit, and total cost is profit equals total revenue minus total costs. 2. An accountant would not count the owner’s opportunity cost of alternative employment as an accounting cost. An example is given in the text in which Helen runs a cookie business, but she could instead work as a computer programmer. Because she's working in her cookie factory, she gives up the opportunity to earn $100 per hour as a computer programmer. The accountant ignores this opportunity cost because money does not flow into or out of the firm. But the cost is relevant to Helen's decision to run the cookie factory. 3. Marginal product is the increase in output that arises from an additional unit of input.
Diminishing marginal product means that the marginal product of an input declines as the quantity of the input increases. 4. Figure 4 shows a production function that exhibits diminishing marginal product of labor.
Figure 5 shows the associated total-cost curve. The production function is concave because of diminishing marginal product, while the total-cost curve is convex for the same reason. 236  Chapter 13/The Costs of Production

Figure 4 Figure 5

5. Total cost consists of the costs of all inputs needed to produce a given quantity of output. It includes fixed costs and variable costs. Average total cost is the cost of a typical unit of output and is equal to total cost divided by the quantity produced. Marginal cost is the cost of producing an additional unit of output and is equal to the change in total cost divided by the change in quantity. An additional relation between average total cost and marginal cost is that whenever marginal cost is less than average total cost, average total cost is declining; whenever marginal cost is greater than average total cost, average total cost is rising.

Figure 6 6. Figure 6 shows the marginal-cost curve and the average-total-cost curve for a typical firm. It has three main features: (1) marginal cost is rising; (2) average total cost is U-shaped; and
(3) whenever marginal cost is less than average total cost, average total cost is declining; whenever marginal cost is greater than average total cost, average total cost is rising.
Marginal cost is rising for output greater than a certain quantity because of diminishing returns. The