question

Short Run Production Function

answer

the maximum quantity of a good or service that can be produced by a set of inputs, assuming at least one input used remains unchanged (fixed).

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Long Run Production Function

answer

the maximum quantity of a good or service that can be produced by a set of inputs, assuming the firm is free to vary the amount of all the inputs being used. Total output increases when both outputs (ex: X and Y from 6.1 and table 6.5) increase by 1 unit. The result is called Returns to Scale.

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Increasing Returns to Scale

answer

increase in a firm's inputs by some proportion results in an increase in output by a greater proportion the firm experiences increasing returns to scale.

Thus, if Eq > 1 we have increasing returns to scale (IRTS)

Thus, if Eq > 1 we have increasing returns to scale (IRTS)

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Constant Returns to Scale

answer

If output increases by the same proportion as the input increase, the firm experience constant returns to scale.

If Eq = 1 we have constant returns to scale (CRTS)

If Eq = 1 we have constant returns to scale (CRTS)

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Decreasing Returns to Scale

answer

A less than proportional increase in output is called decreasing returns to scale.

If Eq < 1 we have decreasing returns to scale. (DRTS)

If Eq < 1 we have decreasing returns to scale. (DRTS)

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Returns to Scale

answer

One way to measure returns to scale is to use a coefficient of output elasticity, Eq:

Eq = % change in Q/ % change in all inputs

Eq = % change in Q/ % change in all inputs

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Cobb-Douglas Production

answer

Q=aL^bK^c

- Power function in which total quantity produced is the result of the product of inputs raised to some power.

- The two inputs are L (manual workers) and K (fixed capital)

- Both inputs must exist for Q to be a positive number

- Function can exhibit increasing, decreasing or constant returns:

If, b + c > 1, returns to scale are increasing

If, b + c < 1, returns to scale are decreasing

If, b + c = 1, constant returns exist

- Elasticities of the factors are equal to their exponents (example b and c). Thus, the elasticities of labor and capital are constants

- Power function in which total quantity produced is the result of the product of inputs raised to some power.

- The two inputs are L (manual workers) and K (fixed capital)

- Both inputs must exist for Q to be a positive number

- Function can exhibit increasing, decreasing or constant returns:

If, b + c > 1, returns to scale are increasing

If, b + c < 1, returns to scale are decreasing

If, b + c = 1, constant returns exist

- Elasticities of the factors are equal to their exponents (example b and c). Thus, the elasticities of labor and capital are constants

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Power Function

answer

Q = aL^b

- A major advantage of the power function is that it can be transformed into a linear function when it is expressed in logarithmic terms, making it amenable to linear

- regression analysis: log Q = loga + blogL

- The direction of the marginal product depends on the size of the exponent b.

If b>1, marginal product is increasing

If b=1, it is constant

If b<1, it is decreasing

- In simple 2 variable model, the power function permits the estimation of marginal product and returns to scale. (2 variable model example: labor & capital); (marginal product example: labor changes and capital remains the same) and (returns to scale example: when both variables change)

- A major advantage of the power function is that it can be transformed into a linear function when it is expressed in logarithmic terms, making it amenable to linear

- regression analysis: log Q = loga + blogL

- The direction of the marginal product depends on the size of the exponent b.

If b>1, marginal product is increasing

If b=1, it is constant

If b<1, it is decreasing

- In simple 2 variable model, the power function permits the estimation of marginal product and returns to scale. (2 variable model example: labor & capital); (marginal product example: labor changes and capital remains the same) and (returns to scale example: when both variables change)

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Various Forms of Production Functions

answer

• Short Run

• Cubic

• Quadratic

• Straight-line (linear)

• Power

• Cubic

• Quadratic

• Straight-line (linear)

• Power

question

Quadratic Cost Function

answer

TC = a + bQ + cQ^2

MC = b +2cQ

AC = a/Q +b +cQ

MC = b +2cQ

AC = a/Q +b +cQ

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Linear Cost Function

answer

TC = a + bQ

MC = b

AC = a/Q + b

MC = b

AC = a/Q + b

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Rules of operations for Quadratic formula

answer

1. Paratheses

2. Multiplication

3. Division

4. Addition

5. Subtraction

6. Inside square root box

- Do all operations under square root box first IN ORDER then take square root

2. Multiplication

3. Division

4. Addition

5. Subtraction

6. Inside square root box

- Do all operations under square root box first IN ORDER then take square root

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Rules for Elasticities

answer

Elastic - demand for luxury goods (furs, gems, expensive automobiles)

Inelastic - demand for goods considered to be necessities (milk, shoes, electricity)

Elastic > 1

Inelastic < 1

Unit Elastic = 1 (in absolute terms)

Inelastic - demand for goods considered to be necessities (milk, shoes, electricity)

Elastic > 1

Inelastic < 1

Unit Elastic = 1 (in absolute terms)

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T-Test Rule

answer

basic test of statistical significance of each regression coefficient. Interpreting the value of t, use the t-table .05 level of significance. T-test only applies to each individual coefficient.

Rule of 2: this means that IF the absolute value of t is greater than 2, then it is significant at the .05 level.

Rule of 2: this means that IF the absolute value of t is greater than 2, then it is significant at the .05 level.

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R^2(Coefficient of determination or R2) Rule

answer

shows the percentage of the variation in a dependent variable accounted for by the variation in all the explanatory variables in the regression equation. Closer R^2 is to 1.0 the greater the explanatory power of the regression analysis. (Example: pizza regression, R^2 = .885, means 88% of variation in demand for pizza can be accounted for by the explanatory variables such as: (price, cost of tuition, soft drink)

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F-test Rule

answer

Often used in conjunction with with R^2. This test measures the statistical significance of the entire regression equation. Either valued on .05 or .01 level, higher is significant and less is insignificant

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Factors for Outsourcing

answer

1. reduce costs - wage differentiation vs. productivity differentiation

2. specialization

3. tax incentives

4. location & transportation costs

5. social factors

6. ease of doing business in another country

2. specialization

3. tax incentives

4. location & transportation costs

5. social factors

6. ease of doing business in another country

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Are opportunity costs relevant or irrelavant?

answer

Relavant

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Are Replacement costs relevant or irrelavant?

answer

Relavant

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Are Sunk costs Relevant or Irrevalant?

answer

Irrelavant (in the past)

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Long Run Total Costs

answer

- In long Run Total Costs, there are no fixed costs

TC=TVC

In increasing returns to scale; costs will increase slowly

<------- on graph

In decreasing retursn to scale; costs increase quickly

---------> on graph

in between is constant returns to scale

TC=TVC

In increasing returns to scale; costs will increase slowly

<------- on graph

In decreasing retursn to scale; costs increase quickly

---------> on graph

in between is constant returns to scale

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Long Run Average Total Cost

answer

Economies of Scale: AS scale of operations increases Average Costs fall

<--------on graph

Diesconomies of Scale: As scale increases average cost will increase

---------> on graph

<--------on graph

Diesconomies of Scale: As scale increases average cost will increase

---------> on graph

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What happens in Economies of Scale?

answer

In production - technology taken advantage at larger scale; Specialization

In Costs - Bulk of discounts; consolidate admin functions;

Efficient supply chain; lower cost of capital borrowing; lower costs of R&D and advertising/marketing

In Costs - Bulk of discounts; consolidate admin functions;

Efficient supply chain; lower cost of capital borrowing; lower costs of R&D and advertising/marketing

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What happens in Diseconomies of Scale?

answer

Scarcity of resources due to costs; bueracracy (HR); management & monitoring; storage/transportation (inventory); compliance

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Relationship between Long Run & Short Run

answer

In the short run averaget total costs are fixed; after in long run envelops all short run curves

(Example on a graph: (Q1)Year 1-5 firm owns 1 shop; (Q2) Year 5-10 firm owns several shops in Tampa Bay; (Q3) Year 10-15 in the state; and (Q4) then in southern region)

Between Q3 and Q4 it is the middle of short run average total cost curves and long run average total cost curves is EFFICIENCY

(Example on a graph: (Q1)Year 1-5 firm owns 1 shop; (Q2) Year 5-10 firm owns several shops in Tampa Bay; (Q3) Year 10-15 in the state; and (Q4) then in southern region)

Between Q3 and Q4 it is the middle of short run average total cost curves and long run average total cost curves is EFFICIENCY

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In Data/Regresson Analysis

answer

Y is dependent variable

X is independent variable

Independent variable are the things to choose for regression analysis (ex: labor and capital)

X is independent variable

Independent variable are the things to choose for regression analysis (ex: labor and capital)

question

Reporting on Natural Logs:

answer

Y = 3X + 6

3 would be the coefficient

6 is the intercept

Logs look like:

LnQ = intercept + coefficient (LnL) + coefficient (LnK)

Q = Quantity

L = Labor

K = Capital

3 would be the coefficient

6 is the intercept

Logs look like:

LnQ = intercept + coefficient (LnL) + coefficient (LnK)

Q = Quantity

L = Labor

K = Capital

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R^2 meaning

answer

Example: data shows R^2 as 0.945

Therefore 94.5% of the variation in quantity is explained by the equation

As we change labor & capital 94.5% of quantity is due that change.

Best fit is finding the highest R^2

Therefore 94.5% of the variation in quantity is explained by the equation

As we change labor & capital 94.5% of quantity is due that change.

Best fit is finding the highest R^2

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Statistical Significance: Rule of 2

answer

If t-stat is more than 2 then it is significant or less than -2 is significant

Significant means if we change labor that it changes qauntity; Meaning, quantity & labor are related strongly

Significant means if we change labor that it changes qauntity; Meaning, quantity & labor are related strongly

question

Marginal Product Labor (MPL)

answer

MPL is only looked at in short run.

Coefficient of L, it is either less than or greather than 1; MPL increasing if greater than 1; MPL decreasing if lesser than 1

APL = MPL is when it is at its maximum

Coefficient of L, it is either less than or greather than 1; MPL increasing if greater than 1; MPL decreasing if lesser than 1

APL = MPL is when it is at its maximum

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Outsourcing benefits

answer

cost savings

question

Outsourcing costs

answer

1. risk in quality

2. research costs

3. risk of competition

4. transportation costs

5. infrastructure

6. intangible costs

7. coordination costs

8. transaction costs (contracts, negotiations)

2. research costs

3. risk of competition

4. transportation costs

5. infrastructure

6. intangible costs

7. coordination costs

8. transaction costs (contracts, negotiations)

question

How to lower costs other than outsourcing?

answer

1. Techonology improvement

2. training for better work efficiency

3. decrease assets

4. layoffs

5. lean production (managing inventory & forecast demand very well)

6. mergers

7. innovations

2. training for better work efficiency

3. decrease assets

4. layoffs

5. lean production (managing inventory & forecast demand very well)

6. mergers

7. innovations

question

Economies of Scope

answer

increaseing scope of production (diversifying)

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Short run analysis:

answer

time series data for a limited time

(Don't need to worry to collect data for fixed factor)

(Don't need to worry to collect data for fixed factor)

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Marginal Cost Curve:

answer

The supply curve is reflective (mirrors) of marginal cost curve.

MC curve upward sloping which is consistent with cubic cost function.

MC curve upward sloping which is consistent with cubic cost function.

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How to estimate long run functions:

answer

1. Better to use cross sectional data (across locations so we can see different scales

2. May be regional differences or factor prices across the board.

3. Relative differences between/among factor prices

4. If looking at different firms need to look at the accounting methods being consistent across firms

5. When looking at results look at averages

2. May be regional differences or factor prices across the board.

3. Relative differences between/among factor prices

4. If looking at different firms need to look at the accounting methods being consistent across firms

5. When looking at results look at averages

question

Natural Monopoly

answer

Firms that get better as they get bigger; always experience economies of scale

(IE: electricity is natural monopoly)

(IE: electricity is natural monopoly)

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Average Total Cost (ATC)

answer

1. When its in equilibrium then economic profit is zero

2. No further entry or exit by any firms when in equilibrim

3. Long run equilibrium - the perfectly competitive firm operates at a minimum point on its ATC curve = EFFICIENT

2. No further entry or exit by any firms when in equilibrim

3. Long run equilibrium - the perfectly competitive firm operates at a minimum point on its ATC curve = EFFICIENT

question

Long Run

answer

As long as TR > TC firm should stay open

IF, TRC < TC then firm should exit industry

d=p=mr

demand=price=marginal revenue

IF, TRC < TC then firm should exit industry

d=p=mr

demand=price=marginal revenue

question

4 Types of market structures

answer

1. Perfect Competition

2. Monopoly

3. Monopoly Competition

4. Oligopoly

Market Structures are defined by degree of market power

2. Monopoly

3. Monopoly Competition

4. Oligopoly

Market Structures are defined by degree of market power

question

Market Power

answer

Market Power is how much control over the price that is charged. Market power depends on how much competition firm faces (how many firms are in the idustry?)

A firm is one unit of production. A collection of firms is industry market.

A firm is one unit of production. A collection of firms is industry market.

question

Characteristics that define market structures:

answer

1. ease of entry or exit

2. short run vs. long run profit

3. ability to differentiate product

4. degree of information about the market & their competitors/ market

2. short run vs. long run profit

3. ability to differentiate product

4. degree of information about the market & their competitors/ market

question

Pefect Competition

answer

A lot of firms

question

Monopoly

answer

1 firm

question

Oligopy

answer

few firms

question

Perfect Competition Characteristics

answer

Lots of firms; no product differentiation (homogenous); easy entry & exit

- This applies to all: Profit maximizers (economic profit) & (costs include opportunity costs)

- Profit = TR-TC

- Perfect Information - All buyers and sellers know same information & particularly about pricing

- Perfectly competitive firms is a PRICE TAKER; meaning take price GIVEN from market

- (Example of Price Takers - hot dog stand industry; gas station coffee)

- In perfect competition ONLY price = Marginal Revenue (P=MR)

- This applies to all: Profit maximizers (economic profit) & (costs include opportunity costs)

- Profit = TR-TC

- Perfect Information - All buyers and sellers know same information & particularly about pricing

- Perfectly competitive firms is a PRICE TAKER; meaning take price GIVEN from market

- (Example of Price Takers - hot dog stand industry; gas station coffee)

- In perfect competition ONLY price = Marginal Revenue (P=MR)

question

Calculation for Price =Marginal Revenue (P=MR)

answer

MR = dTR/dQ

=P

=P*1

=P

**dQ/dQ +dP/dQ**Q=P*1

question

Maximization of Profit

answer

- biggest difference between TR+TC

(Peak of a profit curve)

Change^Profit/^Quantity = 0 (marginal profit)

^(TRC-TC) / ^Q = 0

MR - MC = 0

Set Marginal Revenue to Marginal Costs MR=MC

MR = MC rule holds for all industry forms

Profit max is loss minimization ATC is above price (P) line

(Peak of a profit curve)

Change^Profit/^Quantity = 0 (marginal profit)

^(TRC-TC) / ^Q = 0

MR - MC = 0

Set Marginal Revenue to Marginal Costs MR=MC

MR = MC rule holds for all industry forms

Profit max is loss minimization ATC is above price (P) line

question

When does firm cut losses when losing revenue?

answer

In the short run, stay open (incur loss) if

(TR-TC) < 0

Total Cost (TC) is TFC + TVC

If shuts down, no revenues but will still have fixed costs (TFC)

AS long as TR > TVC stay open

Can variable costs be covered?

(TR-TC) < 0

Total Cost (TC) is TFC + TVC

If shuts down, no revenues but will still have fixed costs (TFC)

AS long as TR > TVC stay open

Can variable costs be covered?

question

Example: What are the elasticities of production of labor and capital in this calculation:

Q = 2.64

Q = 2.64

**L^0.622**K^0.359answer

Labor's coefficient 0.622 is less than 1 so it is inelastic

Capital's coefficient is 0.359 is less than 1 so it is inelastic

Capital's coefficient is 0.359 is less than 1 so it is inelastic

question

In the short run, is the marginal product of labor increasing or decreasing?

Q = 2.64

Q = 2.64

**L^0.622**K^0.359answer

MPL is decreasing because 0.622 is less than 1