Question 1

Florence is considering going into business for herself and has developed the following estimates of monthly costs and revenues to aid her in her decision-making process.She has decided to house the business in a building that she already owns,although she could rent the building to someone else for $1,000 per month.Estimated payments for utilities (electricity,natural gas,water,and telephone)are $475 per month.She will hire one employee at a total cost of $1,100 per month.Inventory is estimated to cost $2,800 per month.Finally,Florence earns $3,000 a month in her current job.
a.How much monthly revenue would Florence have to take in to earn 0 economic profit?
b.Assume that Florence has estimated her monthly revenue to be $9,000.In this case,Florence would earn an accounting profit (loss)of ________,and an economic profit (loss)of ________.
c.Assume instead that Florence does not own a building,and that she will have to rent a building for $1,000 per month (all other estimates remain the same).In this case (assuming estimated monthly revenue is still $9,000),Florence would earn an accounting profit (loss)of ________,and an economic profit (loss)of ________.

Accepted Answer

The answer of Florence is considering going into business for...

Question 2

A firm's short-run cost functions depend primarily on the firm's production function and the prices of the inputs to production.

Accepted Answer

Short-run cost functions are determined by the firm's production function and the prices of inputs which are used in production. The total cost, average cost, and marginal cost curves are derived from the short-run cost function.

Question 3

All else constant,an improvement in technology would cause a firm's marginal,average variable,and average total cost functions to increase (graphically,shift up).

Accepted Answer

An improvement in technology would actually cause a firm's marginal, average variable, and average total cost functions to decrease (graphically, shift down). This is because technology allows for more efficient production and lower costs.

Question 4

In the general textbook treatment,the firm's short run average variable and average total cost curves are U-shaped,while the average fixed cost curve is downward sloping over the entire range of output.Explain why.

Accepted Answer

The answer of In the general textbook treatment,the firm's short...

Question 5

Empirical evidence indicates that most firms operate where marginal and average variable costs are constant.

Accepted Answer

This is known as the "law of diminishing marginal returns" and it suggests that as more units of a product are produced, the marginal costs of producing each additional unit will eventually increase, but the average variable cost will remain constant for a certain range of output. This is why firms often try to produce at the point where marginal cost equals marginal revenue, which is where they can maximize profits.

Question 6

Assume that at the current level of output a firm's marginal cost and average variable cost of production are both decreasing.Based on this,we can conclude that the marginal product and average product of the firm's variable input(s)are both increasing.

Accepted Answer

When marginal cost and average variable cost are both decreasing, it indicates that the firm is experiencing increasing marginal and average returns, respectively. This means that the marginal product and average product of the variable input(s) are both increasing. Therefore, the statement is true.

Question 7

All else constant,if the use of historic costs understates the opportunity costs associated with using a particular piece of capital,accounting profit will be understated.

Accepted Answer

Accounting profit is calculated based on the historic costs of assets, not their opportunity costs. If historic costs understate the opportunity costs, it does not directly affect the calculation of accounting profit, which relies on actual expenses incurred and revenues earned.

Question 8

Complete the table below,which represents the production costs for a typical firm.(Round numbers to the nearest tenth.)
  
At what level of output do diminishing returns set in? How do you know?

Accepted Answer

The answer of Complete the table below,which represents the production...

Question 9

So long as marginal cost is greater than average variable cost,both average variable cost and average total cost must increase as output is increased.

Accepted Answer

This statement is incorrect. As long as marginal cost is greater than average variable cost, only the average total cost will increase as output is increased. The average variable cost may decrease or stay constant in the short run, depending on the shape of the marginal cost curve and the level of fixed costs.

Question 10

Distinguish between implicit and explicit costs and give examples of each.In addition,explain how explicit and implicit costs affect the distinction between economic profit and accounting profit.What explains the distinction between the two measures of profit?

Accepted Answer

The answer of Distinguish between implicit and explicit costs and...

Question 11

In the short run,a firm can minimize its total costs of production by operating at the minimum of its average total cost curve.

Accepted Answer

In the short run, a firm minimizes its total costs by producing at the output level where marginal cost equals marginal revenue, not necessarily at the minimum of its average total cost curve.

Question 12

Economic theory provides insights into the range of possibilities for cost relationships.Studies such as those by Blinder et al.provide insights into where,within that range,many firms operate.Thus,there is no real conflict between theory and reality,as some people might try to claim.

Accepted Answer

Economic theory provides general insights and frameworks for understanding cost relationships, and empirical studies can provide evidence for where firms tend to operate within those frameworks. There is no inherent conflict between theory and reality, as they can inform and build upon each other.

Question 13

When demand for a firm's product decreases,the firm can take a number of steps to adjust costs and quantities supplied to the market.Some are listed below.Which actions are short run and which are long run? Explain your reasoning.
a.Layoff 25 percent of the firm's existing employees.
b.Declare bankruptcy and sell all of the firm's plant and equipment.
c.Require management personnel to take a significant cut in pay.
d.Furlough employees for 3 days each month.
e.Move to a smaller production facility.

Accepted Answer

The answer of When demand for a firm's product decreases,the...

Question 14

Use the following table to answer questions a-c.
  
a.What is the average fixed cost of producing 4 units of output?
b.What is the marginal cost of producing the third unit of output?
c.At what level of output does the firm encounter diminishing marginal returns? How do you know?

Accepted Answer

The answer of Use the following table to answer questions...

Question 15

According to a study by Blinder et al.,on average,fixed costs account for about 44 percent of firms' total costs of production,suggesting that fixed costs are more important to many firms' decision-making processes than standard theory would suggest.

Accepted Answer

The statement accurately reflects the findings of the study by Blinder et al.

Question 16

All else constant,if the use of historic costs understates the opportunity costs associated with using a particular piece of capital,economic profit will be overstated.

Accepted Answer

Economic profit takes into account all opportunity costs associated with the use of capital. If historic costs are used instead of opportunity costs, the economic profit will be overstated as it fails to account for the actual cost of using the capital. Therefore, the statement is true.

Question 17

Use the following information on a hypothetical short-run production function to answer questions a-c.
  
The price of labor is $20 per day.Ten units of capital are used each day,regardless of output level.The price of capital is $50 per unit.
a.Calculate the marginal and average variable product of each unit of labor input.
b.Calculate total,average total,average variable,and marginal costs.
c.Can you tell where diminishing marginal returns sets in?

Accepted Answer

The answer of Use the following information on a hypothetical...

Question 18

Explain the difference between the short run and the long run as it relates to the firm's production function.Why is this distinction important to a firm's manager?

Accepted Answer

The answer of Explain the difference between the short run...

Question 19

Economists recognize what is sometimes referred to as "psychic income" such as the value some people attach to being their own boss.As such,failure to factor in psychic income when calculating economic profit could result in an understatement of the actual economic profit received from a particular enterprise.

Accepted Answer

Economists do recognize the concept of psychic income and not factoring it in when calculating economic profit could lead to an understatement of the actual profit received.

Question 20

After the former CEO of the Coca-Cola Company began requiring employees to treat the rate of return on shareholder equity as an explicit cost,Coke's profits increased considerably.

Accepted Answer

The statement suggests that the requirement led to an increase in profits, indicating that it is true.

Quiz 5: Production and Cost Analysis in the Short Run