Chapter 13
The Costs of Production
REVIEW QUESTIONS
What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?
ANSWER: The opportunity cost of an item refers to all those things that must be forgone to acquire
that item. Both explicit and implicit costs are included as opportunity costs.
A key difference between accountants and economists is their different treatment of the cost of capital.
Does this cause an accountant’s estimate of total costs to be higher or lower than an economist’s
estimate? Explain.
ANSWER: An accountant would not include the forgone interest income that the money could have
earned elsewhere if it had not been invested in the business. Therefore, an accountant’s estimate
of total cost will be less than an economist’s.
The production function depicts a relationship between which two variables? Also, draw a production
function that exhibits diminishing marginal product.
ANSWER: It depicts a relationship between output and a given input. The graph should show output
increasing, but at a decreasing rate as inputs increase.
How would a production function that exhibits decreasing marginal product affect the shape of the
total cost curve? Explain or draw a graph.
ANSWER: The total cost curve will increase at an increasing rate, or in other words, the total cost
curve gets steeper as the amount produced rises.
What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve?
ANSWER: Diminishing marginal product causes the marginal cost curve to rise.
If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the
average total cost curve is rising, what is necessarily true of the marginal cost curve?
ANSWER: When average total cost curve is falling it is necessarily above the marginal cost curve. If
the average total cost curve is rising, it is necessarily below the marginal cost curve.
According to the mathematical laws that govern the relationship between average total cost and
marginal cost, where must these two curves intersect?
ANSWER: The two curves will cross at the minimum point on the average total cost curve.