Production And Cost Concepts Of A Firm 's Total Revenue, Profit, And Total Cost

Production And Cost Concepts Of A Firm 's Total Revenue, Profit, And Total Cost

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Study Guide #4
Module 11. PRODUCTION & COST CONCEPTS
1. What is the relationship between a firm’s total revenue, profit, and total cost?
The total profit of a firm is equal to total revenue minus total cost. In other words, total profit equal total revenue (the amount of a firm receive for the sale of its output) minus total cost( the market value of input a firm uses in production).
2. Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?
An accountant would not count implicit cost (input costs that do not require an outlay of money by the firm) as a cost. It is not included/ ignored because no money flows in or out of the firm. Accountant normally only concerned with the firm’s flow of money, so they record only explicit cost. Economic profit takes both explicit and implicit costs into an account, whereas accounting profit considers only explicit cost.
3. What is marginal product, and what does it mean if it is diminishing?
Marginal product is the increase in output that arises from an additional unit of input. When it is diminishing, the marginal product of an output declines as the quantity of input increases.
4. Explain the shape of a production function that exhibits diminishing marginal product, as well as its associated total cost curve.
A firm’s costs reflect its production process. A typical firm’s production function gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product. As a result, a firm’s total cost curve gets steeper as the quantity produced rises.
5. Define total cost, average total cost, and marginal cost. How are they related? Where does the marginal cost curve cross the avera...


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...and if children and senior citizen have lower willingness to pay for a ticket. In this case, movie theaters raise their profit by price discriminating.
Example #2: Airline Price
Most airlines charge a lower price for a round-trip ticket between two cities if the traveler stays over Saturday night. The reason behind that is that it provides a way to separate business traveler and leisure traveler. A business traveler has a high willingness to pay and, most likely, does not want to stay over a Saturday night. A leisure traveler has a lower willingness to pay and is more likely to stay over a Saturday night. Thus, the airlines can successfully price discriminate by charge a lower price for passengers who stay over a Saturday night.
*I use the previous economic textbook that was used at the Germantown campus (Principle of Economics, Seventh Edition) to get the answers.

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