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Problem Set 3 Terms
Terms in this set (20)
Ecomomic cost equation
Economic cost = implicit cost + explicit cost
Cost of capital
Capital (rental) = Depreciation + foregone investments
Linear cost equation
C = a(Q) + FC
Average variable cost equation
AVC = VC/Q
Average cost equation
AC = AVC + FC
P - MC (or P - a)
Q = FC/P-MC
Capacity problem in linear production
Beyond 60% - 70% capacity, linear production breaks down. If output is above that, you can't be sure that your breakeven computations hold true.
Which product to outsource?
Outsource the one which is not operating at the lowest cost for the product. Firm can outsource at a lower cost than can produce themselves.
Are development costs accounted for in economic costs?
No, it is a sunk cost. It is already spent. It may be an accounting cost, however.
Give an example of linear marginal product of labor.
Each worker increases hourly production by a constant x units. MP = 10
In linear production, what is marginal cost?
MC = w/MPl
Would capital that could be invested elsewhere at a certain rate of return be a cost?
Yes, it would be a Fixed Cost.
If a firm has material costs per unit, where would they be added?
Lowest output at which minimum average cost can be achieved.
What might be confused for economies of scale by an analyst?
Learning curve and economies of scope and diseconomies of scope.
Are fixed costs taken into consideration in short term economic decisions?
No, they may be an accounting cost, but when analyzing an offer in the short term, don't look at the fixed costs - you will have them regardless of your decision. Only consider variable costs and the resulting profit or loss.
If research and development of a product is not related to its marginal cost, what could cause an increase in price that correlates with a decrease in demand?
Elasticity of demand. The optimal price equation shows an inverse relationship between elasticity and price if MC is constant.
If marginal costs increase what happens to output if operating at profit-maximizing production and price?
Profit maximizing is MR = MC, so if MC increases, output decreases.
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