Midterm 2 - additional review & practice

Midterm 2 - additional review & practice - Producer...

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Producer Theory Firms seek to maximize profit. However, we must note that there is a difference between economic profit and accounting profit. Economic Profit = Total Revenue-Total Costs Total Costs in this case represent both explicit (costs of producing) and implicit costs (opportunity costs). TC (economic) = Accounting Costs + Opportunity Costs Economic Profit = Total Revenue - Total Costs (explicit and implicit costs) Accounting Profit = Total Revenue-Total Accounting Costs (explicit costs) Production Function-Costs Curves and their shapes Total Costs = Fixed Costs + Variable Costs If we divide each of the term by the amount of output, we can obtain the average total costs, average fixed costs, and average variable costs. So… ATC = AFC + AVC AFC always declines as output rises because the fixed cost is getting spread over a larger number of units (a higher quantity). This produces a downward-sloping (falling) curve. AVC typically rises as output increases because of diminishing marginal product of labor. Each additional worker contributes less and less to production. Firms would have to hire more and more workers to keep their production growing. This results in rising average variable costs. ATC is the sum of AFC and AVC. This results in a U-shaped cost curve. ATC first falls as output increases and then rises as output increases further. The bottom point of the curve is the minimum ATC. It is where the particular quantity minimizes costs. This point is where the Marginal Cost curve crosses the ATC curve. MC = ∆ TC/∆Q MBAC6010: Managerial Economics Page 1
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MC tells us the increase in TC that arises from producing an additional unit of output. Typically, MC rises as quantity rises. Total Product (TP) Total product tells us the total output produced. Marginal Product (MP) Marginal product tells us the change in total product divided by the change in labor input. So, it is the increase in TP that arises from an increase in the labor input. Average Product (AP) Average product is the total product divided by the units of labor input. So, it is the average amount of TP produced by each worker. Summary of equations: TC = FC + VC AFC = FC/Q AVC = VC/Q ATC = TC/Q or ATC = AFC + AVC MC = ∆TC/∆Q MP = ∆TP/∆L (labor input) AP = TP/L MBAC6010: Managerial Economics Page 2
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Rocket shoes (per day) Total cost (dollars) TFC TVC AFC AVC ATC 0   $12 ___ ___ xx xx xx 1   $20 ___ ___ ___ ___ ___ 2   $26 ___ ___ ___ ___ ___ 3   $30 ___ ___ ___ ___ ___ 4   $32 ___ ___ ___ ___ ___ 5   $36 ___ ___ ___ ___ ___ 6   $42 ___ ___ ___ ___ ___ 7   $50 ___ ___ ___ ___ ___ 8   $64 ___ ___ ___ ___ ___ 9   $88 ___ ___ ___ ___ ___ MBAC6010: Managerial Economics Page 3
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10 $124 ___ ___ ___ ___ ___ MBAC6010: Managerial Economics Page 4
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1. Acme produces rocket shoes for use by slow coyotes. Acme’s total cost schedule is given in the table above. Acme’s total fixed cost is $12.  Complete the table. (In the table,  TFC
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This note was uploaded on 05/31/2008 for the course MBAC 6010 taught by Professor Bonner during the Spring '08 term at Colorado.

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Midterm 2 - additional review & practice - Producer...

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