CH.5 - Assignment Essays

question

Production function

answer

a function that defines the maximum amount of output that can be produced with a given set of inputs

question

Short-run

answer

period of time where some factors of production (inputs) are fixed and constrain a manager's decisions

question

Fixed inputs

answer

inputs a manager cannot adjust in the short run

question

Long-run

answer

period of time over which all factors of production (inputs) are variable and can be adjusted by a manager

question

Variable inputs

answer

inputs a manager can adjust to alter production

question

Total product (TP)

answer

maximum level of output that can be produced with a given amount of inputs

question

Average product (AP)

answer

a measure of the output produced per unit of input

question

Marginal product (MP)

answer

the change in total output attributable to the last unit of an input
- negative marginal product means that the last unit of input actually reduced total product

question

Increasing marginal returns

answer

range of input usage over which marginal product increases

question

Decreasing/diminishing marginal returns

answer

range of input usage over which marginal product declines

question

Negative marginal returns

answer

range of input usage over which marginal product is negative

question

Role of a Manager in the Production Process

answer

- produce output on the production function (by aligning incentives to induce maximum worker effort)
- use the right mix of inputs to maximize profits

question

To maximize profits when labor or capital vary in the short run, the manager will hire:

answer

- labor(L) until the value of the MPL = wage rate
- capital (K) until the value of the MPk = rental rate

question

Value marginal product

answer

value of the output produced by the last unit of an input

question

Law of diminishing returns

answer

the marginal product of an additional unit of output will at some point be lower than the marginal product of the previous unit

question

Profit-maximization input usage

answer

to maximize profits, use input levels at which MB = MC

question

Linear production function

answer

a production function that assumes a perfect linear relationship between all inputs and total output
- inputs are perfect substitutes

question

Leontief production function

answer

a production function that assumes that inputs are used in fixed proportions
- also called "Fixed-proportions production function"

question

Cobb-Douglas production function

answer

a production function that assumes some degree of substitutability among inputs

question

Isoquants

answer

capture the tradeoff between combinations of inputs that yield the same output in the long run, when all inputs are variable

question

Isocost

answer

combination of inputs that yield the same cost
- isocosts farther from the origin are associated with higher costs
- changes in input prices change slopes of isocost lines

question

Marginal rate of technical substitutions (MRTS)

answer

the rate at which a producer can substitute between two inputs and maintain the same level of output
- absolute value of the slope of the isoquant

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Cost minimization

answer

producing output at the lowest possible cost

question

Cost Minimizing input rule

answer

produce at a given level of output where the marginal product per dollar spent is equal for all inputs

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Optimal input substitution

answer

to minimize the cost of producing a given level of output, the firm should use less of an input and more of other inputs when that input's price rises

question

Fixed costs (FC)

answer

do not change with changes in output, include the costs of fixed inputs used in production

question

Variable costs - VC(Q)

answer

costs that change with changes in outputs, include the costs of inputs that vary with output

question

Total costs - TC(Q)

answer

FC + VC(Q)

question

Short-run cost function

answer

a function that defines the minimum possible cost of producing each output level when variable factors are employed in the cost-minimizing fashion (sum of fixed and variable costs)

question

Long-run costs

answer

- all costs are variable
- no fixed costs

question

Average fixed cost (AFC)

answer

FC/Q
- average fixed costs decline continuously as output is expanded

question

Average variable cost (AVC)

answer

VC/Q

question

Average total cost (ATC)

answer

TC/Q

question

Marginal (incremental) cost (MC)

answer

the change in total costs arising from a change in the managerial control variable Q

question

Sunk cost

answer

a cost that is forever lost after it has been paid

question

Irrelevance of sunk costs

answer

a decision maker should ignore sunk costs to maximize profits or minimize losses

question

Cubic cost function

answer

costs are a cubic function of output; provides a reasonable approximation to virtually any cost function

question

Long-run average cost curve

answer

a curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production

question

Economies of scale

answer

declining portion of the long-run average cost curve as output increases

question

Diseconomies of scale

answer

rising portion of the long-run average cost curve as output increases

question

Constant returns to scale

answer

portion of the long-run average cost curve that remains constant as output increases

question

Multiproduct cost function

answer

a function that defines the cost of producing given levels of two or more types of outputs assuming all inputs are used efficiently

question

Economies of scope

answer

exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms

question

Cost complementarity

answer

when the marginal cost of producing one type of output decreases when the output of another good is increased

question

Total product per worker is called

answer

Average product of labor

question

Suppose a firm expands its output and experiences lower long-run average cost.
What is this condition called?

answer

Economies of scale

question

Suppose it is cheaper for an auto maker to produce hybrid vehicles and diesel SUVs in the same factory than it is to have two separate facilities for each vehicle.
What conditions exists?

answer

Economies of scope

question

Which function defines the cost of producing at least two types of output?

answer

Multiproduct cost function

1 of 48

question

Production function

answer

a function that defines the maximum amount of output that can be produced with a given set of inputs

question

Short-run

answer

period of time where some factors of production (inputs) are fixed and constrain a manager's decisions

question

Fixed inputs

answer

inputs a manager cannot adjust in the short run

question

Long-run

answer

period of time over which all factors of production (inputs) are variable and can be adjusted by a manager

question

Variable inputs

answer

inputs a manager can adjust to alter production

question

Total product (TP)

answer

maximum level of output that can be produced with a given amount of inputs

question

Average product (AP)

answer

a measure of the output produced per unit of input

question

Marginal product (MP)

answer

the change in total output attributable to the last unit of an input
- negative marginal product means that the last unit of input actually reduced total product

question

Increasing marginal returns

answer

range of input usage over which marginal product increases

question

Decreasing/diminishing marginal returns

answer

range of input usage over which marginal product declines

question

Negative marginal returns

answer

range of input usage over which marginal product is negative

question

Role of a Manager in the Production Process

answer

- produce output on the production function (by aligning incentives to induce maximum worker effort)
- use the right mix of inputs to maximize profits

question

To maximize profits when labor or capital vary in the short run, the manager will hire:

answer

- labor(L) until the value of the MPL = wage rate
- capital (K) until the value of the MPk = rental rate

question

Value marginal product

answer

value of the output produced by the last unit of an input

question

Law of diminishing returns

answer

the marginal product of an additional unit of output will at some point be lower than the marginal product of the previous unit

question

Profit-maximization input usage

answer

to maximize profits, use input levels at which MB = MC

question

Linear production function

answer

a production function that assumes a perfect linear relationship between all inputs and total output
- inputs are perfect substitutes

question

Leontief production function

answer

a production function that assumes that inputs are used in fixed proportions
- also called "Fixed-proportions production function"

question

Cobb-Douglas production function

answer

a production function that assumes some degree of substitutability among inputs

question

Isoquants

answer

capture the tradeoff between combinations of inputs that yield the same output in the long run, when all inputs are variable

question

Isocost

answer

combination of inputs that yield the same cost
- isocosts farther from the origin are associated with higher costs
- changes in input prices change slopes of isocost lines

question

Marginal rate of technical substitutions (MRTS)

answer

the rate at which a producer can substitute between two inputs and maintain the same level of output
- absolute value of the slope of the isoquant

question

Cost minimization

answer

producing output at the lowest possible cost

question

Cost Minimizing input rule

answer

produce at a given level of output where the marginal product per dollar spent is equal for all inputs

question

Optimal input substitution

answer

to minimize the cost of producing a given level of output, the firm should use less of an input and more of other inputs when that input's price rises

question

Fixed costs (FC)

answer

do not change with changes in output, include the costs of fixed inputs used in production

question

Variable costs - VC(Q)

answer

costs that change with changes in outputs, include the costs of inputs that vary with output

question

Total costs - TC(Q)

answer

FC + VC(Q)

question

Short-run cost function

answer

a function that defines the minimum possible cost of producing each output level when variable factors are employed in the cost-minimizing fashion (sum of fixed and variable costs)

question

Long-run costs

answer

- all costs are variable
- no fixed costs

question

Average fixed cost (AFC)

answer

FC/Q
- average fixed costs decline continuously as output is expanded

question

Average variable cost (AVC)

answer

VC/Q

question

Average total cost (ATC)

answer

TC/Q

question

Marginal (incremental) cost (MC)

answer

the change in total costs arising from a change in the managerial control variable Q

question

Sunk cost

answer

a cost that is forever lost after it has been paid

question

Irrelevance of sunk costs

answer

a decision maker should ignore sunk costs to maximize profits or minimize losses

question

Cubic cost function

answer

costs are a cubic function of output; provides a reasonable approximation to virtually any cost function

question

Long-run average cost curve

answer

a curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production

question

Economies of scale

answer

declining portion of the long-run average cost curve as output increases

question

Diseconomies of scale

answer

rising portion of the long-run average cost curve as output increases

question

Constant returns to scale

answer

portion of the long-run average cost curve that remains constant as output increases

question

Multiproduct cost function

answer

a function that defines the cost of producing given levels of two or more types of outputs assuming all inputs are used efficiently

question

Economies of scope

answer

exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms

question

Cost complementarity

answer

when the marginal cost of producing one type of output decreases when the output of another good is increased

question

Total product per worker is called

answer

Average product of labor

question

Suppose a firm expands its output and experiences lower long-run average cost.
What is this condition called?

answer

Economies of scale

question

Suppose it is cheaper for an auto maker to produce hybrid vehicles and diesel SUVs in the same factory than it is to have two separate facilities for each vehicle.
What conditions exists?

answer

Economies of scope

question

Which function defines the cost of producing at least two types of output?

answer

Multiproduct cost function

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