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Marginal rate of technical substitution (MRTS)
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the rate at which one input can be substituted for another while maintaining the same input
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Marginal Product of Capital (MPK)
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(Change in Q)/ (Change in K)
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Marginal Product of Labor (MPL)
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(Change in Q)/ (Change in L)
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MRTS formula
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(MPL)/(MPK)
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Slope of the isoquant (in absolute value)
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MRTS
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Production Function
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mathematical relationship between various input(s) and output
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Inputs of production function
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Capital (K) and Labor (L)
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Total Product (TP)
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firms output from a given amount of input (Q)
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Marginal product (MP)
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change in a firm's TP as it incrementally changes one input
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MP is equal to
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(Change in TP)/ (Change in Input)
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MPL (table)
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(Change in Q/ Change in L)
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MPK (table)
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(Change in Q/ Change in K)
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MPL (function)
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dQ/ dL
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MPK (function)
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dQ,dK
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Average Product of Labor (APL)
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(Q/L)
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Average Product of Capital (APK)
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(Q/K)
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Increasing Marginal Returns
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A firm increases it's use of one input and the addition to output increase
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Diminishing Marginal Returns
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A firm increases it's use of ONE input and the addition to output diminishes
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Negative Marginal Returns
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A firm increases it's use of one input and the addition to output is negative
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Short Run
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At least one input remains fixed
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Long Run
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sufficiently long period of time such that the firm has complete flexibility in it's input choices
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Value Marginal Product
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the value of the additional output produced form the use of an additional unit of input
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Value Marginal Product of Labor (VMPL)
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MPL* Selling Price
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Value Marginal Product of Capital (VMPK)
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MPK* Selling price
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A firm should continue to use additional units of an input as long as...
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VMP >= Cost of an input
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Slope of TP Curve
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Marginal Product (MP)
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TP Curve Shape
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S- Shape
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MP curve intersects the AP curve at the ___ of the AP curve
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peak
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Linear Production Function
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Q=aK+bL
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Use the linear production function when...
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you have complete substitutability of inputs, L & K are perfect substitutes
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Leontieff Production Function
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Q= min(aK,BL)
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Use the leontieff function when...
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you have fixed proportions between labor and capital or the ratio of labor and capital must remain constant
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Cobb Douglas Production Function
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Q=aK^bL^c
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Use Cobb Douglas production function when...
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there is some substitution between L & K
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Isoquant
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A curve that shows all of the combinations of labor and capital that can produce the same amount of output
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Isocost line
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a curve that shows all of the combinations of L and K that can be used while maintaining the same total cost
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Isoquant and isocost have equal slopes when
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the ascots line is a tangent line of the isoquant line
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At the optimal input combination the additional output per dollar spent on labor equals
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the additional output per dollar spent on capital
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(MPL /w) = (MPK/r)
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the slope on the isocost and the slope on the isoquant are the same.
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Law of Diminishing Marginal Returns
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as a firm increases it's use of one input while holding all other inputs fixed, eventually the addition to output diminishes
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Total Cost
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Total Fixed Cost + Total Variable Cost
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TC/Q
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Average Total Cost
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TFC/Q
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Average Fixed Cost
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TVC/Q
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Average Variable Cost
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Average Total Cost (ATC)
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Average fixed cost (AFC)+ Average variable cost (AVC)
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Marginal Cost -MC (table)
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Change in TC/ Change in Q
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MC function
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dTC/ dQ
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TC and TVC curves
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have the same shape, are continually upward sloping and are separated by TFC
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TFC curve is
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horizontal
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TVC curve
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starts at the origin
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AVC, ATC, MC curves are
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U shaped
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AFC curve
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is continuously downward sloping, cannot touch either axis
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MC curve
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passes through the minimum point of the AVC and ATC curves
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ATC and AVC curves
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are separated by AFC
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Slope of the Total Cost (TC) Curve
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Marginal Cost (MC)
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To find Q where AVC is minimum...
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take the derivative of AVC and set it equal to zero
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Sunk Cost
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cost that has been incurred that can not be recovered, completely irrelevant to the decision making process
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Long Run Average Total Cost Curve (LRATC Curve)
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A U shaped curve that is made up of the lower portions of all the short run ATC curves
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Economies of Scale is also known as...
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Increasing Returns to Scale (IRTS)
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Economies of Scale or IRTS
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occurs when a firm increase use of ALL inputs and it's output increases by a larger percentage
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Constant Returns to Scale (CRTS)
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occurs when a firm increases it's use of ALL inputs and it's output increase by the same percentage
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Diseconomies of Scale is also known as...
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Decreasing Returns to Scale (DRTS)
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Diseconomies of Scale (DRTS)
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occurs when a firm increases it's use of all inputs and it's output increases but by a smaller percentage
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Minimum Efficient Scale
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the smallest Q where ATC is minimized
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Maximum Efficient Scale
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the largest Q where ATC is minimized
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Economies of Scope
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total cost of producing two or more outputs together is less than if these outputs were produced seperately
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Difference between Economies of Scale and Economies of Scope
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Economies of Scale --> Deals with the volume of one product
Economies of Scope --> Deals with the volume of multiple products
Economies of Scope --> Deals with the volume of multiple products
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