Exam II

# Exam II - 1 Micro Exam II Ch. 13-17 Ch.13 The Costs of...

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1 Micro Exam II Ch. 13-17 Ch.13 The Costs of Production Profit = Total revenue – Total cost TR= amt a firm receives from the sale of its output TC= the market value of the inputs a firm uses in production Explicit costs –require an outlay of money (e.g. paying wages to workers, rent, cost of material) Implicit costs –do not require a cash outlay (e.g. the opt cost of the owner’s time, effort) Accounting profit –total revenue minus total explicit costs Economic profit –total revenue minus total costs (including explicit and implicit costs) The Production Function -shoes the relationship between the quantity of inputs used to produce a good, and the quantity of output of that good. Marginal Product -of any input is the increase in output arising from an additional unit of that input, holding all other inputs constant. Marginal product of labor (MPL) = ΔQ/ΔL Why MPL is Important --Rational ppl think at the margin. When X hires an extra worker, his costs rise by the wage he pays the worker and his output rises by MPL. Diminishing marginal product: The marginal product of an input declines as the quantity of the input increases (other things =) In general, MPL diminishes as L rises whether the fixed input is land or capital (equipment, machines, etc) Marginal Cost (MC) The increase in Total Cost from producing one more unit MC = ΔTC/ΔQ Why MC is important? X is rational and wants to maximize his profit. To increase profit, should he produce more product, or less? If the cost of additional product (MC) is less than the revenue he would get from selling it, then X’s profits rise if he produces more. Fixed costs (FC) –do not vary with the quantity of output produced. Variable costs (VC) –vary with the quantity produced. Total cost (TC) = FC + VC Average total cost (ATC) = total cost divided by the quantity of output ATC = TC/Q ATC = AFC + AVC Why ATC is Usually U-shaped As Q rises: Initially, falling AFC pulls ATC down. Eventually, rising AVC pulls ATC up.

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2 ATC and MC When MC < ATC, ATC is falling. When MC > ATC, ATC is rising. The MC curve crosses the ATC curve at the ATC curve’s minimum. Costs in the Short Run & Long Run Short run: Some inputs are fixed. The costs of these inputs are FC. Long run: All inputs are variable. ATC at any Q is cost per unit using the most efficient mix of inputs for that Q. LRATC with 3 Factory Sizes Factories come in many sizes, each with its own SRATC curve. How ATC Changes as the Scale of Production Chnages Economies of scale: ATC falls as Q increases. Constant returns to scale: ATC stays the same as Q increases. Diseconomies of scale: ATC rises as Q increases. Economies of scale occur when increasing production allows greater specialization: workers more efficient
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## This note was uploaded on 04/19/2008 for the course ECON 364 taught by Professor Wellman during the Fall '07 term at Maryland.

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Exam II - 1 Micro Exam II Ch. 13-17 Ch.13 The Costs of...

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