EC308 UNIT 2 - Assignment Essays

question

production

answer

the process by which a person, company, government, or non-profit agency uses inputs to create a good or service for which others are willing to pay

question

final goods

answer

good that is bough by a consumer

question

intermediate goods

answer

good that is used to produce another good

question

production function

answer

mathematical relationship that describes how much output can be made from different combinations of inputs

question

what assumptions exist for firms' production behavior

answer

1. firm produces a single good

2. firm has already chosen which product to produce

3. firms minimize costs associated with every level of production

4. only two inputs are used in production: capital and labor

5. firms can choose labor in short run but capital is fixed

6. the more inputs the firm uses, the more output it makes

7. inputs characterized by diminishing returns

8. firm can employ unlimited capital and labor at fixed prices

9. capital markets are well functioning

question

capital

answer

buildings, equipment

question

labor

answer

all human resources

question

in the short run, firms can choose the amount of _______ but ________ is assumed to be fixed in total supply

answer

labor, capital

question

short run

answer

period of time in which one or more inputs used in production cannot be changed

question

fixed inputs

answer

inputs that cannot be changed in the short run

question

variable inputs

answer

inputs that can be changed in the short run

question

long run

answer

the amount of time necessary for all inputs into production to be fully adjustable

question

average product

answer

total output divided by the total amount of an input used

question

equation for average product of labor

answer

APL= Q/L

question

marginal product

answer

the additional output that a firm can produce with the use of an additional unit of an input

question

marginal product equation

answer

MPL= change in Q/change in L

question

cost minimization

answer

the firm's goal of producing a specific quantity of output at minimum cost

question

what two concepts does cost minimization require

answer

isoquants and isocost lines

question

isoquant

answer

curve representing combinations of inputs that allow a firm to make a particular quantity of output

question

marginal rate of technical substitution (MRTS)

answer

the rate at which the firm can trade input X for Input Y, holding output constant

question

MRTS equation

answer

MRTS(LK)= MPL/MPK

question

what does the curvature of isoquants reveal

answer

the relationship between the products (substitutes vs complements)

question

relatively straight isoquants signify

answer

relative substitutes

question

relatively curved isoquants signify

answer

relative complements

question

perfectly straight isoquants signify

answer

perfect substitutes

question

perfectly L shaped isoquants signify

answer

perfect complements

question

perfect substitutes

answer

can be traded off in a constant ratio in a production process

question

perfect complements

answer

must be used in a fixed ratio as part of a production process

question

what does an isocost line show

answer

all of the input combinations that yield the same cost

question

graphically, where is the point of cost minimization?

answer

tangency between the isoquant for the level of production and the lowest cost isocost line

question

how is minimum cost identifiedq

answer

combination of isoquant and isocost lines

question

mathematically, what is the point of cost minimization

answer

the slope of the isocost line is equal to the slope of the isoquant

question

logically, where is cost minimized

answer

when the marginal product per dollar spent is equalized across inputs

question

if marginal product per dollar spent on capital is higher than the marginal product per dollar spent on labor

answer

more capital and less labor should be used in production

question

if the marginal product per dollar spent on capital is less than the marginal product per dollar spent on labor

answer

more labor and less capital should be used in production

question

returns to scale

answer

the change in output when all inputs are increased in the same proportion

question

constant returns to scale

answer

production increases proportionally with inputs

question

increasing returns to scale

answer

production for which changing all inputs by the same proportion changes output more than proportionally

question

decreasing returns to scale

answer

production for which changing all inputs by the same proportion changes output less than proportionally

question

when might a firm experience increasing returns to scale

answer

fixed costs, learning by doing

question

when might firms experience decreasing returns to scale

answer

they should not experience this

question

total factor productivity growth

answer

an improvement in technology that changes the firm's production function such that more output is obtained from the same amount of inputs

question

expansion path

answer

curve that illustrates how the optimal mix of inputs varies with total output

question

total cost curve

answer

shows a firm's cost of producing particular quantities

question

accounting costs

answer

the direct costs of operating a business

question

what are some examples of accounting costs

answer

raw materials, wages paid to workers, rent paid for office or retail space

question

economic cost

answer

the sum of a producer's accounting and opportunity costs

question

opportunity cost

answer

value of what a producer gives up by using an input

question

accounting profit

answer

firm's total revenue minus accounting cost

question

economic profit

answer

firm's total revenue minus economic cost

question

what is a major component of decisions on the use of inputs

answer

opportunity costs

question

sunk costs

answer

a form of fixed costs that are independent of the quantity of the firm's output

question

what kind of costs cannot be recovered once spent?

answer

sunk costs

question

sunk costs should not be considered when

answer

a firm is deciding whether or not to close

question

what are the two categories of operating costs

answer

fixed cost and variable cost

question

fixed cost (FC)

answer

cost of firm's fixed inputs, independent of the firm's output

question

variable cost (VC)

answer

the cost of inputs that vary with the quantity of the firm's output

question

total cost equation

answer

TC = FC + VC

question

what is important in determining flexibility of different input levels

answer

time horizon

question

cost curve

answer

the mathematical relationship between a firm's production costs and output

question

fixed cost curve is

answer

horizontal

question

variable cost curve is

answer

not constant

question

total cost curve shape

answer

will have the shape of the variable curve but shifted up at each level by the amount of fixed costs

question

average cost

answer

cost divided by output

question

marginal cost

answer

the additional cost of producing an additional unit of output

question

marginal cost only depends on

answer

variable costs

question

when marginal cost is less than average total cost, what occurs?

answer

production of another unit would reduce ATC

question

where are average total costs minimized

answer

ATC = MC

question

short-run total cost curve

answer

describes the total cost of producing various quantities of output when the amount of capital available for use is fixed

question

short run total cost curve will never

answer

fall below the long-run total cost curve

question

in the long run, what happens to short-run ATC curves

answer

they are enveloped by the long-run ATC curve

question

how does the shape of the long-run marginal cost curve compare to that of the short-run

answer

LRMC will be flatter

question

what happens to the long-run ATC curve as a firm grows

answer

economies of scale, constant economies of scale, then diseconomies of scale

question

economies of scale

answer

costs rise more slowly than production

question

constant economies of scale

answer

costs rise at the same rate as output

question

diseconomies of scale

answer

costs rise more quickly than production

question

what is the difference between economies of scale and returns to scale

answer

returns to scale= how does production change when inputs are changed by a common factor

economies of scale= does not deal with a common factor in input proportions

question

economies of scope

answer

the simultaneous production of multiple products comes at a lower cost than if a firm made each product separately then added up the costs

question

when would a firm observe economies of scope

answer

1. flexible inputs or production processes

2. expertise is translatable across several products/services

question

market structure

answer

the competitive environment in which firms operate

question

what three characteristics broadly define market structures

answer

1. number of firms

2. whether the consumer cares which company made the good

3. barriers to entry

question

perfect competition

answer

market composed of many firms producing identical products with no barriers to entry

question

perfect competition firms are

answer

price takers

question

demand line of price takers

answer

horizontal, perfectly elastic

question

profit

answer

difference between total revenue and cost

question

marginal revenue

answer

the additional revenue from selling one additional unit of output

question

how does a perfectly competitive firm maximize profit

answer

price = marginal cost = marginal revenue

question

what happens if MC < P

answer

profit could be increased by producing additional units

question

what happens if MC > P

answer

profit could be increased by reducing production

question

how do firms determine whether or not to shut down?

answer

Continue operating if: TR greater than or equal to VC or P is greater than AVC

Shut down if: TR less than VC or P less than AVC

question

logically, when should a firm continue to operate

answer

as long as total revenue covers variable costs

question

producer surplus for a competitive firm

answer

PS = TR-VC

question

Producer surplus is the sum of

answer

all the individual firms in the industry

question

how does the long run differ from the short run

answer

1. some costs are fixed in SR, all are variable in LR

2. Firms can freely enter/exit in response to market conditions

3. SR supply curve is the portion of SR MC curve above SR AVC curve

question

long run supply curve

answer

the portion of the marginal cost curve above the long run ATC curve

question

free entry

answer

ability of a firm to enter an industry without encountering legal or technical barriers

question

what happens when firms enter a market

answer

supply curve shifts outward

question

what happens if profits are positive in the long run

answer

lack of barriers means more firms will start producing

question

free exit

answer

ability of a firm to exit an industry without encountering legal or technical barriers

question

exiting of firms in an industry causes

answer

supply curve to shift inward

1 of 100

question

production

answer

the process by which a person, company, government, or non-profit agency uses inputs to create a good or service for which others are willing to pay

question

final goods

answer

good that is bough by a consumer

question

intermediate goods

answer

good that is used to produce another good

question

production function

answer

mathematical relationship that describes how much output can be made from different combinations of inputs

question

what assumptions exist for firms' production behavior

answer

1. firm produces a single good

2. firm has already chosen which product to produce

3. firms minimize costs associated with every level of production

4. only two inputs are used in production: capital and labor

5. firms can choose labor in short run but capital is fixed

6. the more inputs the firm uses, the more output it makes

7. inputs characterized by diminishing returns

8. firm can employ unlimited capital and labor at fixed prices

9. capital markets are well functioning

question

capital

answer

buildings, equipment

question

labor

answer

all human resources

question

in the short run, firms can choose the amount of _______ but ________ is assumed to be fixed in total supply

answer

labor, capital

question

short run

answer

period of time in which one or more inputs used in production cannot be changed

question

fixed inputs

answer

inputs that cannot be changed in the short run

question

variable inputs

answer

inputs that can be changed in the short run

question

long run

answer

the amount of time necessary for all inputs into production to be fully adjustable

question

average product

answer

total output divided by the total amount of an input used

question

equation for average product of labor

answer

APL= Q/L

question

marginal product

answer

the additional output that a firm can produce with the use of an additional unit of an input

question

marginal product equation

answer

MPL= change in Q/change in L

question

cost minimization

answer

the firm's goal of producing a specific quantity of output at minimum cost

question

what two concepts does cost minimization require

answer

isoquants and isocost lines

question

isoquant

answer

curve representing combinations of inputs that allow a firm to make a particular quantity of output

question

marginal rate of technical substitution (MRTS)

answer

the rate at which the firm can trade input X for Input Y, holding output constant

question

MRTS equation

answer

MRTS(LK)= MPL/MPK

question

what does the curvature of isoquants reveal

answer

the relationship between the products (substitutes vs complements)

question

relatively straight isoquants signify

answer

relative substitutes

question

relatively curved isoquants signify

answer

relative complements

question

perfectly straight isoquants signify

answer

perfect substitutes

question

perfectly L shaped isoquants signify

answer

perfect complements

question

perfect substitutes

answer

can be traded off in a constant ratio in a production process

question

perfect complements

answer

must be used in a fixed ratio as part of a production process

question

what does an isocost line show

answer

all of the input combinations that yield the same cost

question

graphically, where is the point of cost minimization?

answer

tangency between the isoquant for the level of production and the lowest cost isocost line

question

how is minimum cost identifiedq

answer

combination of isoquant and isocost lines

question

mathematically, what is the point of cost minimization

answer

the slope of the isocost line is equal to the slope of the isoquant

question

logically, where is cost minimized

answer

when the marginal product per dollar spent is equalized across inputs

question

if marginal product per dollar spent on capital is higher than the marginal product per dollar spent on labor

answer

more capital and less labor should be used in production

question

if the marginal product per dollar spent on capital is less than the marginal product per dollar spent on labor

answer

more labor and less capital should be used in production

question

returns to scale

answer

the change in output when all inputs are increased in the same proportion

question

constant returns to scale

answer

production increases proportionally with inputs

question

increasing returns to scale

answer

production for which changing all inputs by the same proportion changes output more than proportionally

question

decreasing returns to scale

answer

production for which changing all inputs by the same proportion changes output less than proportionally

question

when might a firm experience increasing returns to scale

answer

fixed costs, learning by doing

question

when might firms experience decreasing returns to scale

answer

they should not experience this

question

total factor productivity growth

answer

an improvement in technology that changes the firm's production function such that more output is obtained from the same amount of inputs

question

expansion path

answer

curve that illustrates how the optimal mix of inputs varies with total output

question

total cost curve

answer

shows a firm's cost of producing particular quantities

question

accounting costs

answer

the direct costs of operating a business

question

what are some examples of accounting costs

answer

raw materials, wages paid to workers, rent paid for office or retail space

question

economic cost

answer

the sum of a producer's accounting and opportunity costs

question

opportunity cost

answer

value of what a producer gives up by using an input

question

accounting profit

answer

firm's total revenue minus accounting cost

question

economic profit

answer

firm's total revenue minus economic cost

question

what is a major component of decisions on the use of inputs

answer

opportunity costs

question

sunk costs

answer

a form of fixed costs that are independent of the quantity of the firm's output

question

what kind of costs cannot be recovered once spent?

answer

sunk costs

question

sunk costs should not be considered when

answer

a firm is deciding whether or not to close

question

what are the two categories of operating costs

answer

fixed cost and variable cost

question

fixed cost (FC)

answer

cost of firm's fixed inputs, independent of the firm's output

question

variable cost (VC)

answer

the cost of inputs that vary with the quantity of the firm's output

question

total cost equation

answer

TC = FC + VC

question

what is important in determining flexibility of different input levels

answer

time horizon

question

cost curve

answer

the mathematical relationship between a firm's production costs and output

question

fixed cost curve is

answer

horizontal

question

variable cost curve is

answer

not constant

question

total cost curve shape

answer

will have the shape of the variable curve but shifted up at each level by the amount of fixed costs

question

average cost

answer

cost divided by output

question

marginal cost

answer

the additional cost of producing an additional unit of output

question

marginal cost only depends on

answer

variable costs

question

when marginal cost is less than average total cost, what occurs?

answer

production of another unit would reduce ATC

question

where are average total costs minimized

answer

ATC = MC

question

short-run total cost curve

answer

describes the total cost of producing various quantities of output when the amount of capital available for use is fixed

question

short run total cost curve will never

answer

fall below the long-run total cost curve

question

in the long run, what happens to short-run ATC curves

answer

they are enveloped by the long-run ATC curve

question

how does the shape of the long-run marginal cost curve compare to that of the short-run

answer

LRMC will be flatter

question

what happens to the long-run ATC curve as a firm grows

answer

economies of scale, constant economies of scale, then diseconomies of scale

question

economies of scale

answer

costs rise more slowly than production

question

constant economies of scale

answer

costs rise at the same rate as output

question

diseconomies of scale

answer

costs rise more quickly than production

question

what is the difference between economies of scale and returns to scale

answer

returns to scale= how does production change when inputs are changed by a common factor

economies of scale= does not deal with a common factor in input proportions

question

economies of scope

answer

the simultaneous production of multiple products comes at a lower cost than if a firm made each product separately then added up the costs

question

when would a firm observe economies of scope

answer

1. flexible inputs or production processes

2. expertise is translatable across several products/services

question

market structure

answer

the competitive environment in which firms operate

question

what three characteristics broadly define market structures

answer

1. number of firms

2. whether the consumer cares which company made the good

3. barriers to entry

question

perfect competition

answer

market composed of many firms producing identical products with no barriers to entry

question

perfect competition firms are

answer

price takers

question

demand line of price takers

answer

horizontal, perfectly elastic

question

profit

answer

difference between total revenue and cost

question

marginal revenue

answer

the additional revenue from selling one additional unit of output

question

how does a perfectly competitive firm maximize profit

answer

price = marginal cost = marginal revenue

question

what happens if MC < P

answer

profit could be increased by producing additional units

question

what happens if MC > P

answer

profit could be increased by reducing production

question

how do firms determine whether or not to shut down?

answer

Continue operating if: TR greater than or equal to VC or P is greater than AVC

Shut down if: TR less than VC or P less than AVC

question

logically, when should a firm continue to operate

answer

as long as total revenue covers variable costs

question

producer surplus for a competitive firm

answer

PS = TR-VC

question

Producer surplus is the sum of

answer

all the individual firms in the industry

question

how does the long run differ from the short run

answer

1. some costs are fixed in SR, all are variable in LR

2. Firms can freely enter/exit in response to market conditions

3. SR supply curve is the portion of SR MC curve above SR AVC curve

question

long run supply curve

answer

the portion of the marginal cost curve above the long run ATC curve

question

free entry

answer

ability of a firm to enter an industry without encountering legal or technical barriers

question

what happens when firms enter a market

answer

supply curve shifts outward

question

what happens if profits are positive in the long run

answer

lack of barriers means more firms will start producing

question

free exit

answer

ability of a firm to exit an industry without encountering legal or technical barriers

question

exiting of firms in an industry causes

answer

supply curve to shift inward

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