Answers to Questions Microeconomics
There is an inverse relationship between productivity and the cost of production. Increasing the physical productivity of a resource used in the production process reduces the cost of producing goods or services.
As productivity increases, marginal productivity decreases. The marginal product of one input is assumed to fall as long as some other input to production does not change. In short, if capital is not increased while labor is constant, marginal product falls. Marginal cost increases as the quantity of goods increases. As a consequence, average total cost (average cost) also increases (the ATC curve is below the MC curve). Average fixed cost decreases as Q increases. Average variable cost increases as Q increases.
In the short-run, the cost of production increases as Q increases. In the first stage, as Q is increased, cost is decreased. In the second stage where marginal revenue equals marginal cost, cost is at its minimum. As Q is increased, the cost of production is increased indefinitely. In the long-run, as capital, labor, and land are definitely increased, the cost of production is definitely decreased.
As Q is increased definitely, the cost of production is decreased definitely. This is called economies of scale. However, this is not the case in all markets. Some markets exhibit diseconomies of scale. In short, as Q is increased with respect to capital, labor, and land, cost is increased. Vertically integrated firms reduce the cost of producing a general good or service. Because vertically integrated firms are united in a single supply chain, transaction costs tend to be low and flexible. This is in contrast with horizontal integration. The firm seeks to sell its goods to different markets. This process of selling goods to different markets potentially reduces production costs, as price discrimination is possible.
One of the strategies of Wal-Mart is benchmarking. This allows the company to compare its production costs (and other factors) to the production costs of other companies. This allows Wal-Mart to adjust its goods or services.
Application of Cost Concepts
Average variable cost increases (as wage is part of variable cost). Average fixed cost remains the same. Marginal cost increases as variable cost increases.
Marginal cost is affected by the same factors that affect variable cost. A lump-sum tax does not affect this relationship whereas a tax on the marginal unit produced will. If a lump sum tax is imposed on a producer this will not affect his profit maximizing decisions as his output decisions are always based on the margin. He will set MC MR as per normal. However, average cost is now much higher.
The imposition of a stack tax shifts the marginal cost curve rightward. In short, AVC and AC increase. The firm now faces a higher MC.
Marginal productivity in this case decreases. Productivity increases as the number of goods increases. However, if capital remains constant, production decreases (after reaching the optimal point). Cost curves follow the traditional assumptions of short-run production.
Application
Economic profit is the difference between a HYPERLINK httpen.wikipedia.orgwikiFirm o Firm firms total HYPERLINK httpen.wikipedia.orgwikiRevenue o Revenue revenue and its HYPERLINK httpen.wikipedia.orgwikiOpportunity_costs o Opportunity costs opportunity costs. Accounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise. AC is equal to 155 000. EP is equal to 0. She must continue to operate since EP is not yet equal to the minimum of AVC. Future trends will determine whether or not she will work for Cookie Monster.
Peggy-Sue should work for Cookie Monster on the basis of her economic profits (that is, a 30,000 loss). The increase in the opportunity cost of capital due to the 10 required return generated an economic loss.
Peggy-Sue should work for Cookie Monster on the basis of her economic profits (that is, a 15,000 loss). The increase in the opportunity cost of her time generated an economic loss.