explicit implicit total economic normal accounting

Pizza dough, tomato sauce, and other ingredients $20,000 Wages48,000 Interest payments on loan to buy pizza ovens 10,000 Electricity6,000 Lease payment for store24,000 Foregone salary30,000 Foregone interest3,000 Economic depreciation10,000 Total$151,000 Jill Johnson’s Costs per Year The entries in red are explicit costs, and the entries in blue are implicit costs.

Total Fixed Costs Do change with output Do not change with output Total Variable Costs Total Costs = TFC + TVC The factory size can change Long Run Factors like labor and raw materials can be changed Short Run: labor raw materials rent bourbon scotch beer

Average Fixed Costs Do change with output Do not change with output Average Variable Costs Average Total Costs = ?+? Marginal Cost Change in cost with 1 more output

She produces these in her own home without any help, unless she has a large number of orders on a particular day. Marcia Deal bakes and decorates large, elaborate, multi- layered, special occasion cakes.

#TCTFC TVCATC MC With the following information, complete the table: The total cost of producing 5 cakes is $135 Marcia’s total fixed cost for 1 cake is $25 The total cost of 2 cakes is $60 The total variable cost for 1 cake is $25 The total variable cost of producing 7 cakes is $220 The marginal cost of the 6 th cake is $45 The marginal cost for the 8 th cake is $91 The ATC per cake when 3 cakes or when 4 cakes are made is $25 Why is the Marginal Cost of the 7 th and 8 th cakes fairly high?

If Marcia can sell from cakes at $40 each, how many will she choose to produce and sell per day if she is trying to maximize her profits?? On the graph, plot the average total cost and marginal cost of producing from 0 – 8 cakes. Plot the marginal cost at the midpoints

$ Number of Cakes A v e r a g e T o t a l C o s t a n d M a r g i n a l C o s t Graph Marcia’s ATC, MC and MR

$ Number of Cakes A v e r a g e T o t a l C o s t a n d M a r g i n a l C o s t

Number of Cakes Total Revenue Total Cost Total Profit Marginal Revenue Marginal Cost

$ Number of Cakes T o t a l C o s t Graph Marcia’s TC, TFC and TVC

$ Number of Cakes T o t a l C o s t Graph Marcia’s TC, TFC and TVC Total Revenue

Output TFC TVC TC ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Output AFC AVC ATCMC 0 (TFC/output) (TVC/output) (TC/output) (TC1-TC0 ) 1________ _____ 2 ____________ _______ 3 ____________ _______ 4 ____________ _______ 5 ____________ _______ 6 ____________ _______ 7 ____________ _______ 8 ____________ _______ 9 ____________ _______ 10 ____________ _______

Cost Output Total Variable Cost Total Fixed Cost Total Cost

Cost Output Graphed and

LRAC Cars Built 600, , , , , , Constant Returns to Scale Diseconomies of Scale Economies of Scale Gets less efficient as size increases Gets more efficient as size increases Efficient Range of Production

Economies of Scale Less efficient as size increases More efficient as size increases Diseconomies of Scale Constant Returns to Scale Efficient Range of Production

The least cost combination of inputs. Efficient Production The recipe: going from inputs to outputs It varies by firm

Like Labor In the beginning, output increases with each unit added, but at some point output will begin to decrease with each additional unit of a resource. ATC curve goes down as efficiency increases Then begins to go up The Law of Diminishing Returns

Labor Total Marginal Average Data: Output ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ 3

Output Quantity of Labor Total Output

Output Quantity of Labor Average and Marginal

1.Which of the following is most likely to be an implicit cost of production? a.property taxes on a building owned by the firm b.transportation costs paid to a trucking supplier c. rental payments for a building utilized by the company and rented from another party d.interest income foregone on funds invested in the firm by the owners 2.The law of diminishing returns a.explains why marginal cost eventually increases as output expands. b.implies that average fixed cost will remain unchanged as output expands. c.is true for physical production activities but not for activities such as studying. d.applies to a capitalist economy but would be irrelevant if the means of production were owned by the state. 3.Which of the following represents a long-run adjustment? a.the hiring of four additional cashiers by a supermarket b.a cutback on purchases of coke and iron ore by a steel manufacturer c.construction of a new assembly-line plant by a car manufacturer d.the extra dose of fertilizer used by a farmer on his wheat crop

4.The short-run average total cost (ATC) curve of a firm is U-shaped because a.larger firms always have lower per-unit costs than smaller firms. b.at low levels of output, AFC will be high, while at high levels of output, MC will be high as the result of diminishing returns. c.diminishing returns will be present when output is small, and high AFC will push per-unit cost to high levels when output is large. d.diseconomies of scale will be present at both small and large output rates. 5. When costs that vary with the level of output are divided by the output, you have calculated a.total changing cost. b.total fixed cost. c.average fixed cost. d.average variable cost. 6.A downward-sloping portion of a LR average total cost curve is the result of a.economies of scale. b.diseconomies of scale. c.diminishing returns. d.the existence of fixed resources. 7. In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be a. $25. b. $2,500. c.$5,000. d.$7,500.

At what output in the graph would the firm’s per-unit cost of production be minimized? a.3 b. 4 c. 5 d. 6 What is the firm’s approximate total cost when it produces three units? a.10 b. 16 c. 48 d. 60 What is the firm’s total cost when it produces four units? 1 b. 15 c. 60 d. 75 The average variable cost and average total cost for a firm are indicated in the graph. If the marginal cost curve were constructed, at what output would it cross the AVC curve? 0 b. 15 c. 20 d. 25 At what output should a the marginal cost curve cross the ATC curve? 5 b. 20 c. 25 d. 30 b. 4 c. 48 c. 60 b. 15 b. 20