Production and Cost Analysis
5ummarY
An economically efficient production process Imo be technically efficient, but a technically efficient process need not be economically efficient. (L012- I ) , The long-run average total cost curve is U-shaped. Economies of scale initially cause average total cost to decrease; diseconomies eventually cause average total cost to increase. (LO 12-2) Production is a social, as well as a technical, phenomenon., that’s why concepts like team spirit are important—and that’s why diseconomies of scale occur. (L012-2) • The marginal cost and short-run average cost curves slope upward because of diminishing marginal productivity. The long-run average cost curve slopes upward because of diseconomies of scale. (L012-2)
Key Terms t
constant returns to scale (250) depreciation (257) diseconomies of scale (248)
economically efficient (246) economies of scale (246) economies of scope (253) entrepreneur (252)
Questions and Exercises
I. What is the difference between technical efficiency and economic efficiency? (L012-1) 2. One farmer can grow 1.000 bushels of corn on 1 acre of land with 200 hours of labor and 20 pounds of seed. Another farmer can grow 1,000 bushels of corn on 01 f eascredeo.f land with 100 hours of labor and 20 pounds (L012-1) a. Couldtt both methods be technically efficient? b I possible that both of these production processes are economically efficient? 3. A dressmaker can sew 800 garments with 160 bolts of fabric and 3,000 hours of labor. Another dressmaker can sew 800 garments with 200 bolts of fabric and 2,000 hours
2′;’)
• There is an envelope relationship between short-run average cost curves and long-run average cost curves. The short-run average cost curves are always above the long-run average cost curve. (L012-2)
• An entrepreneur is an individual who sees an opportu-nity to sell an item at a price higher than the average cost of producing it. (L012-3)
• Once we start applying cost analysis to the real world, we must include a variety of other dimensions of costs that the traditional model does not cover. (L012-4)
• Costs in the real world are affected by economies of scope, learning by doing and technological change, the many dimensions to output, and unmeasured costs such as opportunity costs. (L012-4)
indivisible setup cost (247) learning by doing (254) minimum efficient level of production (248)
monitoring cost (249) team spirit (249) technical efficiency (246) technological change (255)
of identical labor. Fabric costs $100 a bolt and labor costs $10 an hour. (L0/2-1) a. Is it possible for both methods to be technically efficient’) Why or why not? b. Is it possible for both methods to be economically efficient? Why or why not? 4. A student has just written on an exam that, in the long run, fixed cost will make the average total cost curve slope downward. Why will the professor mark it incorrect? (L012-2) 5. Why could diseconomies of scale never occur if production relationships were only technical relationships? (L012-2)
Cr.onnari by namScanner
napter I I • Production and Cost Analysis, I Costs ate generally divided intofixed costs, variable ci)0. and total costs. (L011-3) rC VC; MC = Change in TC; AFC FC/Q; AVC VC/(2: ATC = AFC + AVC. 011-3) , The average variable cost curve and marginal cost curve are mirror images of the average product curve and the marginal product curve, respectively. (L011-4)
Key Terms
average fixed cost (233) average product (230) average total cost (233) average variable cost (233) economic profit (228)
uestion
firm (227) fixed cost (232) law of diminishing marginal productivity (232) long-run decision (230)
241
• The law of diminishing marginal productivity causes marginal and average costs to rise. (11)11-4)
• If MC > ATC. then AR* is rising. If MC = ATC, then ATC is constant. If MC < ATC. then ATC is falling. (I.011-4)
• The marginal cost curve goes through the minimum points of the average variable cost curve and average total cost curve. (L011-4)
marginal cost (234) marginal product (230) production (226) production function (230) production table (230)
and Exercises 3141 connect. ECONOMICS
at costs and revenues do economists include when cal-lating profit that accountants don’t include? Give an ex-Pie of each. (Lo/i-I) eggy-Sue’s cookies are the best in the world, or so I ar. She has been offered a job by Cookie Monster, try come to work at $125,000 per year. Currently. is producing her own cookies, and she has revenues .$260,000 per year. Her costs arc $40,000 for labor, 10000 for rent. $35,000 for ingredients, and $5,000 Utilities. She has $100,000 of her own money’ vested in the operation, which, if she leaves. can sold for $40,000 that she can invest at 10 percent r year. (LOI/M Caieulate her accounting and economic profits. ‘ Advise her as to what she should do. Ooman has been infected by the free enterprise hug. firm on extraterrestrial affairs. The rent of u )dirt $4.000. the cost of the two secretaries is is •099. and the cost of electricity and gas comes to ).:There’s a great demand for his information, 4 t°1141 revenue IlITIOUIltS to $10()•()()0’ By working 6rm, though. Economan forfeits the $50,000 he by working for the Friendly Space Agency, ‘”.000 he could Ine,e earned as interest had he
profit (227) short-run decision (230) total cost (228) total revenue (228) variable cost (232)
saved his funds instead of putting them in this business. (L01/-/) a. What is his profit or loss by an accountant’s definitions’? h. What is his profit or loss by an economist’s definitions’? 4. What distinguishes the short-run from the long run? (L011-2) 5. What is the difference between marginal product and average product? (L011-2) 6. Explain how studying for an exam is subject to the law of diminishing marginal productivity. (L011-2) 7. Find TC, AFC. A VC, AC, and MC from the following table. (L011-3)
Units
FC
VC
0 $100 $ 0 1 100 40 2 100 60 3 100 70 4 100 85 5 100 130
Scanned by CamScanner