ECON 200 - Second Exam

ECON 200 - Second Exam - Antonio Alarcon 03/24/08 ECON 200...

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Antonio Alarcon 03/24/08 ECON 200 Second Exam Second Exam Cost Concepts o Sunk Cost – Costs that you no longer control Should not influence one’s decisions as the cost is lost o Implicit Cost – Value of resources used in production for which no monetary payment is made Represent the value that the firm’s resources could command in their next best alternative use o Explicit Cost – Payments made to others as a cost of running a business Include wages paid to labor, the cost of materials, electricity, telephone… o Marginal Cost ( MC ) – Refers to the change in total cost when one or more unit of output is produced MC = ΔTC / ΔQ Firm increases output from 0 printers to 1 printer, total cost rises from 50 to 130 MC = 130 – 50 = (80) Firm increases output from 1 printers to 2 printers, total cost rises from 130 to 200 MC = 200 – 30 = (70) o Profit – Difference between the amount of revenues a firm takes in (total revenue) and the amount it spends for wages, materials, electricity… Accounting Profit ( AP ) – Total revenue minus explicit costs; costs that are payable to others AP = Total revenue – Explicit costs Accounting profit of 6.7 billion on revenues of 219.8 billion o 6.7 / 219.8 billion = 0.03 = 3% For each 100 dollar computer monitor sold, accounting profits of 3 Economic Profit ( EC ) – Total revenue minus the sum of explicit plus implicit costs EC = Total revenue – (explicit costs + implicit costs) o Marginal product ( MP ) – Change in output that results from changing labor by one additional unit MP = Δ Total product / Δ Labor Company increases labor from 0 to 1 worker, total output rises from 0 to 1000 MP = 1000 – 0 = (1000) Company increases labor from 1 to 2 workers, total output rises from 1000 to 2200 MP = 2200 – 1000 = (1200) Diminishing Returns – Each additional unit of variable input yields less and less output Company increases labor from 4 to 5 workers, total output rises from 4700 to 5800 o MP = 5800 – 4700 = (1100)
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Antonio Alarcon 03/24/08 ECON 200 Second Exam In comparison to 1200 marginal product realized from 2 workers, the 1100 marginal product realized from 5 workers is 100 lower o Long-Run Average Total Cost Curve ( LRATC ) – Shows the minimum cost per unit of producing each output level when any desired size of a factory can be constructed Curve decreases with increases in output up to a certain point (reaches minimum) then increases with further increases in output Economies of Scale – LRATC curve slopes downward Realized by an increase in scale and production by the means of: o Specialization of Labor and Management o Efficient Capital o Design and Development Diseconomies of Scale – LRATC curve slopes upward Realized by diminishing returns in terms of exhausted scale and production o Long Run Cost – Period in which all inputs are considered as variable in amounts
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ECON 200 - Second Exam - Antonio Alarcon 03/24/08 ECON 200...

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