CLEP Microeconomic Notes 1

# Ii 1 unit 44 aiii 2 units 52 aiv 3 units 59 av 4

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a.ii) 1 unit - \$44 a.iii) 2 units - \$52 a.iv) 3 units - \$59 a.v) 4 units - \$64 a.vi) 5 units - \$71 a.vii) 6 units \$79 b) Total Variable Costs = Total Costs (\$59) – Fixed Costs (\$35) c) Total Variable Costs = 24 d) Average Variable Costs = TVC (\$24)/Quantity (3) e) AVC = \$8.00 e.i) Average variable Costs will fluctuate based on the number of units produced 94) Economic Profits = Total Revenue (TR) – (explicit + implicit costs) a) Economic Profits Method includes opportunity cost (implicit and explicit costs) a.i) Ex: of implicit costs: owner working for free, owner investing in capital, or using personal resource (a.i.1) Implicit Costs are the opportunities foregone to run a business a.ii) Ex. of explicit costs: wages, rent, materials a.iii) If Jim spends 2 hrs building a table instead of working at his \$20 hrs job, the supplies for the table cost \$45, and he sells the table for \$100. Jim’s Economic Profits are: (a.iii.1.a.i) Economic Profits = Total Revenue (explicit + implicit costs) (a.iii.1.a.ii)Economic Profits = \$100 – 85 (\$45 (supplies) + \$40 (\$20 per hr wages x 2 hrs)) (a.iii.1.a.iii) Economic Profit = \$15 b) Accounting Profits = total revenue – explicit costs (does not include implicit cost) b.i)Ex. of explicit costs: wages, rent, materials b.ii) If Jim spends 2 hrs building a table instead of working at his \$20 hrs job, the supplies for the table cost \$45, and he sells the table for \$100. Jim’s Accounting are: (b.ii.1.a) Accounting Profits = Total Revenue (minus explicit costs ) (b.ii.1.b) Accounting Profits = \$100 – 45 (supplies) (b.ii.1.c) Accounting Profit = \$55 95) Negative Economic Profits – occur when total costs (including opportunity costs) are greater than revenue 96) ATC = ATC + AFC a) Average Total Cost is equal to the sum of average fixed costs (AFC) and average variable cost (AVC) a.i) Ex of fixed costs: rent, equipment, taxes, insurance a.ii) Ex of variable costs: labor, utilities, and production related materials b) The average total cost curve ATC curve ALWAYS intersects the AVC and ATC at the lowest points 97) Average Total Cost (ATC) a) When they produce 4 units of output (below) the ATC per unit is ? a.i) 0 units - \$35 a.ii) 1 unit - \$44 a.iii) 2 units - \$52 a.iv) 3 units - \$59 a.v) 4 units - \$64 a.vi) 5 units - \$71 a.vii) 6 units \$79 b) Average Total Cost (ATC) can be found using this formula b.i)ATC = TC/Q

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b.ii) ATC = \$64 / 4 b.iii) ATC = \$16.00 98) Total Cost a) TC = (AVC + AFC) / Quantity ?? 99) Average Variable Cost (AVC) - if prices are below the minimum point on this AVC curve – the firm should shut down 100) Economies of Scale – decreased costs per unit as a result of increased production a) Example: when a firm doubles its input and triples output (lower ATC) a.i) If a firm triples input and triples output – neither (equal ATC) a.ii) If a firm quadruples its input and triples output – diseconomy of scale (higher ATC) 101) Diseconomies of Scale – when increased output leads to increased per unit costs 102) Short Run – a period of time during which some of the expenses are fixed and supply cannot fully adjust to changes in demand a) Fixed costs do not change in the short run 103)
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