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Production Functions
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describe what is technically feasible when the firm operates efficiently. The function that indicates the maximum output per unit of time that a firm can produce for every combination of inputs.
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An increase in non-labor income while holding the wage rate constant
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shifts the budget line up (in the direction of the consumption axis) while maintaining the same slope.
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All of the following represent an increase in non-labor income except for:
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A decrease in the income tax rate.
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The law of diminishing marginal returns assumes that
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there is at least one fixed input and the firm is operating in the short run
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Marginal Product of an input
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The addition to total output due to the addition of the last unit of input, holding all other inputs constant.
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C = L^0:5M^0:75
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increasing returns to scale for all output levels
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If input prices are constant, a firm with increasing returns to scale can expect
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costs to go up less than double as output doubles
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Rising marginal cost implies that average total cost is also rising.
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False
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When marginal cost is below average total cost, the latter is falling.
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True
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When marginal cost is above average variable cost, AVC is rising.
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True
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production function that exhibits constant returns to scale
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q=K+L
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A firm has a Cobb Douglas technology. At the optimum combination of inputs
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A)the slopes of the isoquant and isocost curves are equal.
B) costs are minimized for the production of a given output.
C) the marginal rate of technical substitution equals the ratio of input prices.
B) costs are minimized for the production of a given output.
C) the marginal rate of technical substitution equals the ratio of input prices.
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Isoquant Curve
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A producers Indifference curve
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Isocost Curve
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a producer's budget line
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Suppose that the price of labor (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100?
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100 = 10L + 20K
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A firm with Cobb-Douglas technology employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. How could the firm reduce its costs of producing its current output level?
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by employing more labor and less capital.
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Increasing returns to scale in production means
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less than twice as much of all inputs is required to double output.
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reservation wage
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the MRS when not working at all. Thus, WRES = MRS at maximum leisure
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optimal mix of consumption and leisure is found by
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setting her MRS equal to her wage and solving for hours of leisure given the budget line
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optimal capital-labor ratio
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MRTSL;K =(w/r)
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The difference between the economic and accounting costs of a firm are
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the opportunity costs of the factors of production that the firm owns.
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Consider a firm with an increasing marginal cost, in a perfectly competitive market. If current output is less than the profit-maximizing output, then the next unit produced
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may or may not increase profit.
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At the proÖt-maximizing level of output, marginal proÖt
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is zero
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Because of the relationship between a perfectly competitive Örmís demand curve and its marginal revenue curve, the proÖt maximization condition for the Örm can be written as
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P = MC.
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If a graph of a perfectly competitive Örm shows that the MR = MC point occurs where MR is above AVC but below ATC,
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the Örm is earning negative proÖt, but will continue to produce where MR = MC in the short run.
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If price is between AVC and ATC, the best and most practical thing for a perfectly competitive Örm to do is
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continue producing in the short run, but plan to go out of business in the long run.
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The firms decision to produce zero output when the price is less than the average variable cost of production is known as
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the shut down rule
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The firms supply decision
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is to generate zero output for all prices below the minimum AVC.
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The short-run supply curve for a competitive firm
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its MC curve above the minimum point of the AVC curve.
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If the owner of a business pays himself no salary, then the accounting cost is zero, but the economic cost is positive.
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True. Since there is no monetary transaction, there is no accounting, or explicit, cost. However, since the owner of the business could be employed else- where, there is an economic cost. The economic cost is positive, and reáecting the opportunity cost of the ownerís time.
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A firm that has positive accounting profit does not necessarily have positive economic profit
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True. Accounting profit considers only the explicit, monetary costs. Since there may be some opportunity costs that were not fully realized as explicit mone- tary costs, it is possible that when the opportunity costs are added in, economic profit will become negative. This indicates that the firms resources are not being put to their best use.
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If a firm hires a currently unemployed worker, the opportunity cost of utilizing the workerís services is zero.
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False. From the firmís point of view, the wage paid to the worker is an explicit cost regardless of whether she was previously unemployed or not. The firmís oppor-tunity cost is equal to the wage, because if it did not hire this worker, it would have had to hire someone else at the same wage. In this case, the opportunity cost is the same as the accounting cost. From the workerís point of view, the opportunity cost is the value of her time. By taking this job, she cannot work at another job or take care of a child or elderly person at home, or enjoy leisure. These are all considered as foregone opportunities and the benefit of the most valuable choice among these alternatives is the opportunity cost.
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economic profit
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An economic profit or loss is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from revenues earned.
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accounting profit
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Accounting profit is a company's total earnings, calculated according to generally accepted accounting principles (GAAP). It includes the explicit costs of doing business, such as operating expenses, depreciation, interest and taxes.
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Because of the relationship between a perfectly competitive Örmís demand curve and its marginal revenue curve, the proÖt maximization condition for the Örm can be written as
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P = MC.
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