question

What is a production function?

answer

It describes the relationship between any given combination of inputs and the maximum attainable output from those inputs, given the current technology.

question

What is the short run?

answer

A period of production in which some inputs cannot be varied (i.e. number of machines, space for the machines). There is some flexibility (labor is flexible), but not much. There is a limit to what can be produced.

question

What is the long run?

answer

A period of production long enough for all inputs to be varied (i.e. can move plants and get more space, purchase more machinery, etc.). There is flexibility and the amount of production can be varied.

question

When studying production, what is the main assumption?

answer

We are in the short run and labor is variable while capital (k) is not.

question

What is the total product curve?

answer

The amount of output produced by a given amount of labor. (It answers the question, given a certain amount of workers, how much will I be able to produce?)

question

What is the marginal product of labor?

answer

The extra output produced with one more unit of labor.

question

How do you calculate marginal product of labor?

answer

(the change in quantity produced)/(the change in labor)

question

What is the point of diminishing returns?

answer

The point at which marginal product of labor begins to decline

question

What is the average product of labor?

answer

The output per unit labor. This is a measure of labor productivity.

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How do you calculate average product of labor?

answer

the total quantity produced/the total amount of labor used to produce this quantity

question

What happens to the average product of labor if the marginal product of labor is less than the average product of labor?

answer

The average product of labor will decrease.

question

What happens to the average product of labor if the marginal product of labor is more than the average product of labor?

answer

The average product of labor will increase.

question

What is occurring if the marginal product of labor is equal to the average product of labor?

answer

The average product of labor is at its maximum.

question

What is economic cost?

answer

The monetary value of all inputs used including implicit costs which measure the value of non purchased items (i.e. it measures the value of the opportunity costs)

question

In the short run, what two categories are costs divided into?

answer

(1) Fixed costs

(2) Variable costs

(2) Variable costs

question

What are fixed costs?

answer

They do not vary with output and are sometimes called overhead costs.

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What are variable costs?

answer

Costs that depends on the number of units of output produced.

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What is total cost?

answer

The sum of fixed costs and variable costs.

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How do you derive the variable cost curve?

answer

Switch the axes of the production function, which therefore flips the production function upside down.

question

What is the variable cost curve?

answer

It shows the variable cost associated with any given quantity produced. It answers the question, how much will it cost to produce a specific amount of product.

question

How do you derive the total cost function?

answer

You simply shift the variable cost curve up until it begins with the price of the fixed costs (since fixed costs are fixed and do not vary with output).

question

What does the average variable cost curve look like?

answer

A parabola-- because the average product of labor will first rise then fall in the short run, the average variable cost curve for a firm will decline and then increase again

question

What happens to the average variable costs when average product of labor increases?

answer

The average variable costs will decrease

question

How do you calculate average variable costs?

answer

(variable costs/quantity produced)

question

How do you calculate average cost?

answer

(total cost/quantity produced)

question

How do you calculate marginal cost?

answer

(the change in cost/the change in quantity produced)

question

What does the marginal cost curve look like?

answer

As quantity increases, it will decrease at first, reach a minimum, and then increase rapidly. It crosses the average variable cost curve at a minimum.

question

What happens to average variable costs if marginal cost increases?

answer

Average costs increase

question

What happens to average variable costs if marginal cost decreases?

answer

Average variable costs decreases