1. Chapter 8
Costs of Production
6/15/2018

2. What is a Fixed Cost?
Cost to a firm that does not vary with the quantity of goods produced

3. What are examples of Fixed Costs?
rent or mortgage
a part of utilities

4. Fixed Cost is also known as…..
Sunk Cost

5. What is a Variable Cost?
Cost that varies with the quantity of goods produced

6. What are examples of Variable Costs?
worker’s wages
raw materials
some utilities
some taxes

7. What is Labor Productivity?
The output per laborer per hour

8. Under what condition is it cheaper to pay $10 an hr. to a U. S
Under what condition is it cheaper to pay $10 an hr. to a U.S. worker than $1 an hour to a foreign worker?

9. If the U.S. worker is more than 10 times as productive as the foreign worker

10. Why do labor costs per unit of output changes as more units of labor are hired?
Price of labor increases
Quality of labor decreases
Labor productivity Changes

11. Why do non-labor, variable costs per unit of output increase as output increases?
Resources become more scarce

12. Does the cost of all resources increase more than production increases?
No, the costs of some resources may vary proportionately with the level of production

13. What is Total Variable Cost?
The sum of specific variable costs in the firm’s cost structure

14. Total Variable Costs $ Q

15. What are Total Costs?
Cost to the firm that includes both fixed and variable costs

16. TC
Total Costs $
TVC
TFC Q

17. What is Average Total Cost?
Total cost divided by the quantity of goods produced

18. $ TC
TVC 10
ATC = 9
5/2 = 2.5 8 7 6 5
ATC = 4
6/5 = 1.2 3 6 5 2 1 Q 1 2 3 4 5 6 7 8 9 10

19. $ 10 9 8 7
ATC 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

20. What is Average Variable Cost?
Total variable cost divided by the quantity of goods produced

21. $ 10 9
TVC 8 7 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

22. $ 10 9 8 7
ATC 6 5
AVC 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

23. What is Average Fixed Cost?
Total fixed cost divided by the quantity of goods produced

24. Costs
AFC
Quantity
2424

25. What is Marginal Cost?
The change in total cost incurred by adding one more unit of output to production

26. If the only thing we observe is a change in total cost associated with a small change in output produced then MC is computed in the following way.
MC = Q TC

27. $ TC 10
MC = 9
3/3 = 1 8 3 7 6 5 3 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

28. $ TC 10 9 8 7 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

29. TC,
TVC,
TFC
TFC Q1 Q2 Q3 Q MC
ATC
AVC
AFC Q

30. MC
Costs
Avg. Fixed Costs
ATC
AVC
Quantity

31. Why does MC = ATC at minimum ATC?
If the marginal is above the average, the average increases
If the marginal is below the average, the average decreases

32. $ 10 MC 9
ATC 8 7
AVC 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

33. $ 10 MC 9
ATC 8 7
AVC 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

34. What is the Short Run?
A time in which producers can change some, but not all of its resources

35. What is the Long Run?
The time in which producers can change quantity of all resources

36. Short-run Vs. Long-run Average Cost
$ per unit of Output
SRACD
SRACC
SRACA
SRACB
LRAC Q1 Q2 Q3 Q

37. What are Economies of Scale?
When a firm increases resources in the long run and ATC decreases

38. What are Diseconomies of Scale?
When a company increases resources in the long run and ATC increases