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production function
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a function that defines the maximum amount of output that can be produced with a given set of inputs
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total product
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the maximum level of output that can be produced with a given amount of inputs
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average product
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a measure of the output produced per unit of input
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marginal product
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the change in total output attributable to the last unit of an input
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increasing marginal returns
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range of input usage over which marginal product increases
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decreasing (diminising) marginal returns
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range of input usage over which marginal product declines
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negative marginal returns
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range of input usage over which marginal product is negative
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Phases of Marginal Returns
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as the usage on an input increases, marginal product initially increases, then begins to decline, and eventually becomes negative
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Value marginal product
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the value of the output produced by the last unit of an input
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Prift Maximizing input usage
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to maximize profits, a manger should use inputs at levels at which the marginal benefit equals the marginal cost. more specifically, when the cost of each additional unit of labor is w, the manager should continue to employ labor up to the point where VMP L = w in the range of diminishing marginal product
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isoquant
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defines the combinations of inputs that yield the same level of output
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marginal rate of technical substitution
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the rate at which a producer can substitute between two inputs and maintain the same level of output
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isocost line
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a line that represents the combinations of inputs that will cost the producer the same amount of money wL+rK=C
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Changes in Isocosts Principle
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for given input prices, isocosts farther from the origin are associated with higher costs. Changes in input prices change the slopes of isocost lines
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Cost Minimizing Input Rule
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p. 181
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economies of scope
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when the total cost of producing two types of outputs together is less than the total cost of producing each type of output separately
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cost complementarity
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when the marginal cost of producing one type of output decreases when the output of another good is increased
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