SOLUTIONS TO SELF-CHECK QUESTIONS
6.1 Explicit and Implicit Costs, and Accounting and Economic Profit
- Accounting profit = total revenues minus explicit costs = $1,000,000 – ($600,000 + $150,000 + $200,000) = $50,000.
- Economic profit = accounting profit minus implicit cost = $50,000 – $30,000 = $20,000.
6.2 Production in the Short Run
- A production function is the mathematical equation that tells how much output a firm can produce within given amounts of time.
- A fixed input is a factor of production that can’t be easily increased or decreased in a short period of time. Conversely, a variable input is a factor of production a firm can easily increase or decrease in a short period of time.
- Marginal product is the change in a firm’s output when it employs more labor. The marginal product is calculated by dividing the change in total product by the change in labor. It is represented by the following formula: MP=ΔTP/ΔL.
marginal product = change in total product/change in variable input
change in total product = 275 square feet – 200 square feet
change in total product = 75 square feet
marginal product = 75 square feet/ 1 worker
marginal product = 75
6.3 Costs in the Short Run
- A fixed cost is one that does not vary with output, such as the cost of a building or land, whereas a variable cost increases with output, such as labor or supplies.
- Marginal cost is the additional cost of producing one more unit. Average total cost is total cost divided by units produced and average variable cost is total variable cost divided by units produced.
- Fixed costs are represented by a horizontal line, variable costs slope upward, marginal costs tend to slope upward, average total costs are U-shaped and average variable costs are U-shaped as well and lie below average total costs.
6.4 Production in the Long Run
- This is the situation that existed in the United States in the 1970s. Since there is only demand enough for 2.5 firms to reach the bottom of the average cost curve, you would expect one firm will not be around in the long run, and at least one firm will be struggling.
6.5 Costs in the Long Run
- Economies of scale occur when average costs decrease with increases in output. Constant returns to scale show no such decrease, and diseconomies of scale show increase in average costs as output rises.
- A long-run average cost curve illustrating economies of scale will be downward sloping, constant returns to scale will be horizontal and diseconomies of scale will be upward sloping.