Question: When a firm is operating in the short-run they have to have at least one ___________ cost of production.

25 Oct 2022,10:16 PM

 

Calculate the following costs of production in the schedule below (to the nearest tenth).  Each of the calculations are worth 2 points, questions #1- #4 are worth 1 point, and question #5 and #6 are worth 2 points.  The total points on the assignment is 20.

 total fixed costs (TFC): are cost that do not change as output is expanded.  Total fixed cost are found under total cost (TC) at the quantity of zero (0).

 total variable cost (TVC): are costs that do change as output is expanded.

 total cost (TC): are found by adding total fixed cost (TFC) + total variable cost (TVC).

average fixed cost (AFC): are found by taking the total fixed cost (TFC) and dividing them by the quantity (Q)

average variable cost (AVC): are found by taking the total variable cost (TVC) and dividing them by the quantity (Q).

average total cost (ATC): are found 2 ways either by taking the total cost (TC) and dividing them by the quantity (Q) or ATC can be found by adding AFC + AVC.

marginal cost (MC):  are found by taking the change in total cost and diving it by the change in quantity (Q).

 

Q            TFC                TVC            TC              AFC            AVC             ATC           MC

__0 __________________$0______$500________________________________________

 

__1__________________200__________________________________________________

 

__2__________________320__________________________________________________

 

__3__________________460 _________________________________________________

 

__4__________________700__________________________________________________

__5________________ 1,080__________________________________________________

 

__6________________1,530__________________________________________________

 

__7________________2,130__________________________________________________

1. Which of the following costs will always fixed as output is expanded?  ____________

2.  When a firm is operating in the short-run they have to have at least one ___________ cost of production.

3. If a firm always experiences economies of scale the average total cost curve would always be _______________ (increasing; constant; decreasing).

4.  The marginal cost curve (MC) will intersect average total cost (ATC) at the (lowest or highest) point of ATC.  ___________ 

5.  Which 2 cost curves will take a U-shape?  __________________  and _______________

6. If a firm continues to add additional units of a variable resource to a given fixed level of a resource initially output will ___________________ but eventually after time _____________.

 

 

The reason why the supply curve is upward sloping is because as prices rise assuming costs remain the same the firm will offer more for sale to increase profits.

        In order to calculate profit or loss a firm will take total revenue (TR) and subtract off total costs (TC).  TR = price (P) x quantity (Q).  TC = total fixed costs (TFC) will NOT change as output is expanded + total variable costs (TVC) will change as output is expanded.  Total fixed costs (TFC) can be found when the quantity of output is zero.  If you are given total costs (TC) and total fixed costs(TFC) you can get total variable cost by subtracting TC - TFC = TVC.

      Law of diminishing marginal returns: is when successive units of a variable resource are added to fixed resources the additional output produced will first increases and then will eventually decrease.  Diminishing marginal returns occurs because efficiency of variable resources depends on the quantity of fixed resources. 

       The calculation of average costs of production.  There are 3 types of average costs:

1. average fixed cost (AFC) = total fixed costs (TFC) / output (Q) when plotted will always decrease as output is increased.
2. average variable costs (AVC) = total variable costs (TVC) / output (Q) when plotted will have a U shape do to the law of diminishing marginal returns.
3. average total cost = total costs (TC) / output (Q) it can also be calculated as:  ATC = AFC + AVC when plotted will also have a U shape do to the law of diminishing marginal returns.

 The U shape of the long-run ATC represents 4 types of economies of scale:

1.  Economies of scale: is when output increases costs decrease.  
2.  Constant returns to scale:  is when output increases costs remain 

      constant.

3.  Diseconomies of scale:  is when output is expanded costs increase.

4.  Minimum efficient scale:  is when the minimum or lowest point or a firm’s

     ATC.

      The calculation of marginal costs of production measures the additional cost of supplying an additional unit of output.  Marginal cost (MC) = the change in total costs (TC) / the change in quantity of output (Q).  If MC is < ATC the ATC are falling.  When MC > ATC the ATC are increasing.  MC will intersect ATC at the minimum or lowest point of ATC.  When MC = ATC this represents the firm’s most efficient output.

      A firm operating in the short- run: refers to a time period in which at least one of the resources is fixed.

     A firm operating in the long-run: refers to a time period when all costs of production are variable there are no fixed costs.  The long-run allows firm’s to make changes in their cost of resources, once a resource has change to a different size or scale; they sign a contract the firm again would be operating in the short-run.

                                        Output and resource costs.

Total physical product (TPP):  is the total output that can be produced when a firm adds successive levels of a variable resource to a given level of a fixed resource.

 

Average physical product:  is output per unit of a resource.  To calculate take:  TPP/ quantity of the variable resource.

 

Marginal physical product:  is the additional output that is produced when an additional unit of a variable resource is used.  To calculate MPP take:   the change in TPP/ the change in the quantity of the variable resource. 

*** The TPP, APP, and MPP show that as a variable resource increases output will first increase at an accelerated pace, then begin to slow down and eventually decrease, this is what is referred to as the law of diminishing marginal returns from a resource (defined on page 1).  When MPP is > APP; APP will increase.  The opposite is true when MPP is < APP; APP will decrease.  MPP will intersect APP at the maximum point of APP.