Matthew Bender 11.5.

2009
Dr. Jantzen Eco 201

III B

1) The economic concept of costs differ from the accounting costs in that the economic costs of
production usually exceed the accounting costs of production because economic costs include
both explicit accounting costs and implicit costs
.
2) Fixed Costs are the costs that do not change as output changes. For example: Rents, Leases,
Auto Insurance, Liability, and etc. Variable Costs are the costs that do change as the output
changes. Such as wages, supplies, payroll taxes, and etc.

3) The concept of diminishing returns refers to how the marginal production of a factor of
production, in contrast to the increase that would otherwise be normally expected, actually
starts to progressively decrease the more of the factor are added. It effects the behavior of the
short run because as the size increases, the average cost will eventually go up as constraints
bind the firm.

4) Avg Total Cost: fixed cost per unit

Total fixed cost/output

Avg Variable Cost: Variable cost per unit

Total variable cost/output

Avg Total Cost: total cost per unit

Total Costs/output
AFC plus AVC

Marginal Cost: measures the extra cost per extra unit produced
change in total cost/change in output

5) The long run cost estimates are derived from strategic planning costs. They represent the
size of the business and measure the constraints in order to have the best ATC and Marginal
Cost.

6) Constraint returns to scale is as the size changes, long run average cost stays the same
Economies of Scale is as the size goes up, the long run avg total costs goes down
Diseconomies of Scale is as the size goes up the average total costs goes up
-they differ from company to company because every company has there own costs and
expenses causing them all to act separately

7) I chose Exxon Mobile, Ford Motors, and General Electric. In exxon they are most likely
effected by the constraint returns to scale because they it is in a very competitive market
and the big guys cant wipe out the little companies if there are constraint returns. In ford
they use economies of scale because they use very specialized equipment to make
production higher than other companies such as Rolls Royce given them an ability to
increase there size and allow for long run avg costs to decrease. General Electric also
 uses the economies of scale because they use a big scale tech and more coordination
with supplies.

III C

1) Purely Competitive Market : 1) many sellers and buyers

2)all sellers sell a identical product
3) Easy entry and Exit
4) There's no production secrets

2) The price and output levels in a purely competitive market are determined by the
market of supply and demand. They use the best output rule to determine the price
and output level of the product. They keep producing and expanding depending on
the price to as long as the marginal revenue is greater than the marginal cost. The
marginal costs decides how much to sell because it shows how much profit the
company will get for each unit they are selling and shows if they will generate
positive revenue. The maximum amount a company should be willing to lose is no
more than the company's fixed cost.
3) I. maxium allowable loss is 40
ii. output 40
iii. Output 36
iv. 10
v. close