Holt 7525-9 S15_IT

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In Example 5A, the $1200 monthly rent on Birdwell’s shop is a fixed cost. Whether Birdwell produces zero birdhouses each day, or forty-four, the $1200 monthly rent does not change. As short run production is increased, the amount of variable inputs used in production must be increased. Thus, the costs associated with variable inputs (variable costs) increase with output. Variable costs – costs that vary with output. In Example 5B, the labor cost incurred by Birdwell is a variable cost. The more birdhouses that are produced each day, the more workers that will be required, and the greater the labor costs. For simplicity, we will assume that all costs are either fixed or variable. Thus, the sum of fixed costs and variable costs equals total cost. Total cost – the sum of fixed and variable costs. Average Costs of Production Average production costs are calculated by dividing the specific type of production cost by the quantity of output produced. Thus the following formulas: Average total cost (ATC) = total cost ÷ quantity of output Average fixed cost (AFC) = fixed costs ÷ quantity of output Average variable cost (AVC) = variable costs ÷ quantity of output Just as the sum of fixed costs and variable costs equals total cost, the sum of average fixed cost and average variable cost equals average total cost. Average fixed cost + Average variable cost = Average total cost Example 6: Robin Birdwell starts a new business building luxury birdhouses. The fixed cost (rental on a shop) is $120 per day. The primary variable input is labor. The maximum number of luxury birdhouses that can be produced in the shop each day is eight. The production costs incurred are indicated on the table below. The average cost curves and the marginal cost curve are illustrated on the graph on the next page. Birdhouse Total Fixed Variable Marginal Quantity Cost Cost Cost Cost AFC AVC ATC 0 $120 $120 $0 X X X X 1 160 120 40 $40 $120 $40 $160 2 190 120 70 30 60 35 95 3 230 120 110 40 40 37 77 4 285 120 165 55 30 41 71 5 360 120 240 75 24 48 72 6 460 120 340 100 20 57 77 7 590 120 470 130 17 67 84 8 755 120 635 165 15 79 94 Notice that marginal cost initially decreases, indicating an efficiency advantage from producing two birdhouses instead of only one. As mentioned earlier in this chapter, greater efficiency often occurs as workers are initially added to production. The increased number of workers allows for more specialization of labor. But with the third birdhouse the law of diminishing marginal returns sets in and the marginal cost begins to increase. FOR REVIEW ONLY - NOT FOR DISTRIBUTION The average fixed cost decreases as additional units of output are produced. This will always be the case, as fixed costs are being spread over an increasing amount of output. The average Production and Costs 20 - 4
variable cost initially decreases, for the same reason that marginal cost initially decreases. But with the third birdhouse the law of diminishing marginal returns sets in and the marginal cost begins to increase. The increase in marginal cost means that the average variable cost also increases. The average total cost is the sum of the average fixed cost and the average variable cost. The average total cost initially decreases, mainly due to the rapid decrease in average fixed cost. Eventually, the effect of diminishing marginal returns causes average variable cost to increase more rapidly than average fixed cost is decreasing. This causes average total cost to increase from the fifth unit onward. The marginal cost, average fixed cost, average variable cost, and average total cost curves are illustrated on the graph below. Notice from the graph that the marginal cost curve eventually slopes upward (from unit two onward). This is because, as discussed earlier, diminishing marginal returns causes increasing marginal cost. Also, notice that the marginal cost curve intersects the ATC curve and the AVC curve at their minimum points. This will always be the case. Marginal cost is the change in total cost (and variable cost) that results from producing an additional unit of output. If the marginal cost of the additional output is less than the ATC (or the AVC), the ATC (or the AVC) will decrease. If the marginal cost is greater than the ATC (or the AVC), the ATC (or the AVC) will increase. $170 - 160 - MC 150 - 140 - 130 - 120 - 110 - 100 - Costs 90 - 80 - 70 - 60 - 50 - 40 - 30 - 20 - 10 - 0 0 1 2 3 4 5 6 7 8 Quantity of Birdhouses FOR REVIEW ONLY - NOT FOR DISTRIBUTION ATC AVC AFC 20 - 5 Production and Costs
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PRINCIPLES OF ECONOMICS JEFF HOLT S
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Principles of Economics, 6th Editio
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16. Study Guide for Chapter 7 17. C
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11. Appendix: Book Review - “The
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20. Appendix: The NCAA Cartel 21. S
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Introduction: A Brief History of U.
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In the twentieth century, per capit
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Appendix: The 35 Largest National E
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Multiple Choice: ___ 1. The Jamesto
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2. Describe the economic cost of th
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Chapter 1 Scarcity and Choices The
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Example 5B: At the end of 1982, the
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Example 11: When Cindy quits her jo
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consequences may result in failure
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An upward sloping curve (as in Exam
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In making decisions, humans tend to
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5. ______________________ _________
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___ 13. If the value of one variabl
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Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7
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Chapter 2 Trade and Economic System
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Example 4B: The following quantitie
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1. An increase in the quantity of r
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3. For whom to produce? This is det
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The graph below illustrates the shi
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The two primary economic systems ar
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___ 12. The capitalist vision sees
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___ 25. According to the book “Ca
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Chapter 3 Demand, Supply, and Equil
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. For inferior goods, income and de
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The same information can be placed
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Not only does a free market elimina
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$7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
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Example 17: The graph below illustr
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Questions for Chapter 3 Fill-in-the
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___ 12. Assuming a market originall
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$8 - 7 - 6 - 5 - Price 4 - 3 - 2 -
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Chapter 4 Inflation and Unemploymen
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Computing the Rate of Inflation The
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Full Employment Though unemployment
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3. Cyclical unemployment - due to d
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During the Great Depression, the ec
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Appendix: Think Like an Economist -
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Answer questions 8. and 9. based on
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___ 25. The extension of unemployme
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Chapter 5 Measuring Total Output: G
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5. Leisure. Leisure time is by defi
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The U.S. is a high per capita GDP c
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Example 17: In “An International
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The simple circular flow diagram be
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___ 3. Which of the following would
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2. Explain what nonproduction trans
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Chapter 6 The Aggregate Market The
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Example 2C: Assume the same facts a
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Example 5B: The price of crude oil
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Price Level Real GDP SRAS AD 2 AD 1
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Appendix: Why the Aggregate Demand
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___ 3. DEF Company can invest in ne
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2. List and explain the two factors
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Chapter 7 Classical Economic Theory
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Notice that the investment demand c
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Long-Run Equilibrium If Real GDP is
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Example 6B: When the economy is in
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Laissez-faire If the economy is sel
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___ 5. According to Say’s Law: a.
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3. On the graph below, draw an aggr
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Chapter 8 Keynesian Economic Theory
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Example 2B: The graph below illustr
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Example 5: Assume that the table be
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Notice on the graph on the previous
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According to Keynesian theory, a ch
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“The General Theory” also inclu
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___ 8. If the consumption function
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3. If the MPC is .667, and investme
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Chapter 9 Fiscal Policy The basic e
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Keynesian Fiscal Policy Theory and
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Example 5A: The federal government
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The Laffer Curve What will happen t
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Appendix: The Importance of Incenti
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___ 4. A decrease in government exp
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2. Explain what automatic stabilize
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Chapter 10 Money, Money Creation, a
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Example 4B: The castaways on Gillig
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Looking at the balance sheet below,
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Demand-side One-shot Inflation Exam
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4. Inflation increases uncertainty
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life; it came into existence not by
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calculated by using the potential d
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___ 12. If the required-reserve rat
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4. Referring to the balance sheet f
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Chapter 11 The Federal Reserve Syst
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5. After Bank X sells the $300,000
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Low Mortgage Interest Rates Mortgag
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Relaxed Standards for Mortgage Loan
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The Bursting of the Housing Bubble
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On February 17, 2009, the federal g
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Fed policies caused short-term inte
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___ 10. The Fed’s most important
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___ 25. In response to the recessio
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Chapter 12 Monetary Policy The basi
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2. A change in aggregate demand (AD
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Monetarist Transmission Mechanism C
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3. Borrowers do not have to seek ou
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Appendix: Book Review - “The Age
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Questions for Chapter 12 Fill-in-th
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___ 16. The primary source of incom
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7. According to Alan Greenspan, wha
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Chapter 13 Taxes, Deficits, and the
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Example 5: In 2015, Taxpayer A had
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of $5 and a quantity of 10 units. T
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The complexity of the tax law also
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the current government spending and
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cut of 1964. The top rate was lower
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___ 6. Federal excise taxes: a. are
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3. How would eliminating the loopho
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Chapter 14 Economic Growth The basi
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2. Labor. Labor can contribute to e
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estricting international trade (e.g
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An improvement in technology (e.g.
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The table below shows the economic
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will increase both Real GDP and per
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___ 8. Which of the following is co
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___ 26. The opinion that economic g
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Chapter 15 Less Developed Countries
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Example 8: Countries A, B, C, and D
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Obstacles to Economic Development f
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c. Restrictions on international tr
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Appendix: Book Review - “The Powe
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Example 25: In Brazil, about half t
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Study Guide for Chapter 15 Chapter
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___ 13. Among the counterproductive
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4. List four ways that governments
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Chapter 16 International Trade The
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Other Benefits of Free Internationa
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Example 6: The graph below illustra
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competitive disadvantage. But dumpi
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is only 25% as productive as before
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Smith was skeptical of government a
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___ 4. For Country X, what is the o
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___ 18. Frédéric Bastiat’s “P
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4. On the graph below: (1) What is
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Page 303 and 304: Example 9: Capital City operates a
Page 305 and 306: Marginal rate of substitution - the
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Page 345 and 346: Chapter 21 Perfect Competition The
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Example 9: The Organization of the
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Example 12 illustrates the dilemma
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its current price and quantity. The
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___ 14. Game theory: a. is a method
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Answers for Chapter 23 Fill-in-the-
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Chapter 24 Factor Markets The basic
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$ $240 - 200 - 160 - 120 - 80 - 40
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Since producers will attempt to equ
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2. Differences in nonmoney aspects
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were his strikeouts, walks, and hom
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___ 3. To maximize profits, a produ
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___ 19. According to the book, “M
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Multiple Choice: 1. a. 8. c. 15. d.
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Chapter 25 Labor Unions The primary
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The elasticity of demand for union
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Example 4A: Assume that the graph b
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Notice from the graph in Example 6
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Wage Factory A Quantity of Labor S
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As a cartel, a labor union faces a
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___ 10. For a monopsony: a. there i
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3. The graph below represents a lab
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Chapter 26 Interest, Present Value,
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An increase in expected rates of re
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An asset is valuable because we exp
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Example 13B: General Ordnance prove
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Appendix: Present Value Table One f
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___ 4. An increase in expected rate
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Problems: 1. List and explain the t
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Chapter 27 Market Failure The basic
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External Benefit If a market genera
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Example 2: To encourage the consump
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$100 - 90 - 80 - MSC 70 - $ 60 - 50
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A common good is nonexcludable. Non
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___ 5. What government policy would
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4. Based on the information on the
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Chapter 28 Public Choice and Govern
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Candidates and the Median Voter Mod
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Example 8: According to State and F
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Example 10: When Elvis Presley was
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4. Pessimistic bias. This is the te
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___ 5. An elected official will: a.
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2. If a certain policy will yield s
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Chapter 29 Government Regulation of
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underproduction is the amount that
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micromanagement results in business
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market. They may agree with their c
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Questions for Chapter 29 Fill-in-th
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___ 10. The public interest theory
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4. List the four types of costs imp
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Chapter 30 Agriculture and Health C
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weather may cause bumper crops. Bad
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Security and Rural Investment Act o
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Example 12: From 1960 to 2013, the
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1. NHI would provide universal heal
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d. Insurance providers are not allo
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Answer questions 7. through 10. by
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___ 21. If there were no individual
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Chapter 31 Income Distribution and
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Income is more equally distributed
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over a typical career is the accumu
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Ideal Income Redistribution The ide
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Poverty - a family whose income fal
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Appendix: Income Inequality around
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How is this story an analogy for th
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___ 2. In 2013, the Lowest Income 6
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Problems: 1. Explain the two primar
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Absolute advantage - when one natio
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Fiat money - money by government de
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Nonrivalrous good - a good for whic
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Absolute advantage, 16-9 Absolute e
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“Company town”, 25-6 Comparativ
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Eli Lilly and Company, 22-1 Emergen
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Houston, Texas, 15-10 Human capital
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Market, 3-1, 3-8-9 Market basket, 4
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Political bias, 9-4, 12-7 Political
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Short run production, 20-2-3 Short-
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Upturns, 9-4 USDA, 27-9, 30-1-2, 30
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