ECON 2150 CH 7 WITH COMPLETE SOLUTIONS
Explicit costs - ANSWER Costs that involve a direct monetary outlay. (airline's
expenditures on fuel and salaries)
Implicit costs - ANSWER Costs that do not involve outlays of cash. (income it forgoes
by not leasing its jets)
opportunity cost - ANSWER the value of a resource in its best alternative use.
The only alternative we consider is the best alternative
Economic costs - ANSWER Sum of a firm's explicit costs and implicit Costs.
accounting costs - ANSWER Total of a firm's explicit costs.
sunk costs - ANSWER are costs that must be incurred no matter what the decision.
These costs are not part of opportunity costs. Costs that have already been incurred
and cannot be recovered.
non-sunk costs - ANSWER are costs that must be incurred only if a particular decision
is made.
Cost minimization problem: - ANSWER Finding the input combination that minimizes a
firm's total cost of producing a particular level of output.
Cost minimization firm: - ANSWER A firm that seeks to minimize the cost of producing a
given amount of output.
, Long run: - ANSWER A period of time when the quantities of all of the firm's input can
vary.
Short run - ANSWER A period of time when at least one of its inputs' quantities is fixed.
Long-run cost minimization - ANSWER Minimize the firm's costs, subject to a firm
producing a given amount of output.
Cost to the firm:
TC = Total Cost
w = wage rate
L = Quantity of Labor
r = price per unit of capital services
K = Quantity of Capital
TC=wL+rK (need to find (K*,L*) to min TC and make 100) (Q(K,L)=^-Q)
(ex. if Q=f(K,L)=100 then MAXTL(profit)=TR-TC =PxQ-TC =^_TR-minT)C
Isocost Line - ANSWER The set of combinations of labor and capital (L and K) that yield
the same total cost for the firm. Producer tries to find the lowest possible Isocost line. K
on y axis and L on x axis and increasing total cost is the graph more right and/or up
(think L with arrow each end). Isocost is a straight downward sloping line.
Isocost Line formula - ANSWER K= TC/(r-(w/r)L) or K=(TC/r) - (w/r)L (TC/r is the vertical
intercept, and w/r is the horizontal intercept)
Long-Run Cost Minimization: Cost minimization subject to satisfaction of the isoquant
equation: - ANSWER Q0=f(L,K) Note: analogous to expenditure minimization for the
consumer
Long-Run Cost minimization: tangency condition: - ANSWER MRTSL,K = -MPl/MPk =
-w/r (or) MPl/w = MPk/r
Explicit costs - ANSWER Costs that involve a direct monetary outlay. (airline's
expenditures on fuel and salaries)
Implicit costs - ANSWER Costs that do not involve outlays of cash. (income it forgoes
by not leasing its jets)
opportunity cost - ANSWER the value of a resource in its best alternative use.
The only alternative we consider is the best alternative
Economic costs - ANSWER Sum of a firm's explicit costs and implicit Costs.
accounting costs - ANSWER Total of a firm's explicit costs.
sunk costs - ANSWER are costs that must be incurred no matter what the decision.
These costs are not part of opportunity costs. Costs that have already been incurred
and cannot be recovered.
non-sunk costs - ANSWER are costs that must be incurred only if a particular decision
is made.
Cost minimization problem: - ANSWER Finding the input combination that minimizes a
firm's total cost of producing a particular level of output.
Cost minimization firm: - ANSWER A firm that seeks to minimize the cost of producing a
given amount of output.
, Long run: - ANSWER A period of time when the quantities of all of the firm's input can
vary.
Short run - ANSWER A period of time when at least one of its inputs' quantities is fixed.
Long-run cost minimization - ANSWER Minimize the firm's costs, subject to a firm
producing a given amount of output.
Cost to the firm:
TC = Total Cost
w = wage rate
L = Quantity of Labor
r = price per unit of capital services
K = Quantity of Capital
TC=wL+rK (need to find (K*,L*) to min TC and make 100) (Q(K,L)=^-Q)
(ex. if Q=f(K,L)=100 then MAXTL(profit)=TR-TC =PxQ-TC =^_TR-minT)C
Isocost Line - ANSWER The set of combinations of labor and capital (L and K) that yield
the same total cost for the firm. Producer tries to find the lowest possible Isocost line. K
on y axis and L on x axis and increasing total cost is the graph more right and/or up
(think L with arrow each end). Isocost is a straight downward sloping line.
Isocost Line formula - ANSWER K= TC/(r-(w/r)L) or K=(TC/r) - (w/r)L (TC/r is the vertical
intercept, and w/r is the horizontal intercept)
Long-Run Cost Minimization: Cost minimization subject to satisfaction of the isoquant
equation: - ANSWER Q0=f(L,K) Note: analogous to expenditure minimization for the
consumer
Long-Run Cost minimization: tangency condition: - ANSWER MRTSL,K = -MPl/MPk =
-w/r (or) MPl/w = MPk/r
