question
A simple model of a firm is...
answer
inputs --> production --> output
question
The object of a firm is to...
answer
maximize profits
question
4 Steps of a Perfectly Competitive Market
answer
1. Producers are fairly homogenous
2. Large number of small buyers and sellers
3. Buyers and sellers have enough information about current market
4. Free entry and exit
2. Large number of small buyers and sellers
3. Buyers and sellers have enough information about current market
4. Free entry and exit
question
Describe an example of a perfectly competitive market.
answer
A farmer selling at a farmers market
--> make production decisions taking market price given
--> make production decisions taking market price given
question
What is marginal product?
answer
The increase in slope that results from the addition of one unit of an input, holding all other inputs constant
question
Define the meaning of:
MPL= df(L,K)/dL
MPL= df(L,K)/dL
answer
how fast q goes up as we marginally increase labor at fixed capital constant
question
Define the meaning of:
MPK=df(L,K)/dK
MPK=df(L,K)/dK
answer
how fast q goes up as we marginally increase capital at fixed labor constant
question
Describe steps to solve below problem:
Suppose that q=20L^0.4K^0.5 and K=25. What is the marginal product of labor at L=2?
What does the answer mean?
Suppose that q=20L^0.4K^0.5 and K=25. What is the marginal product of labor at L=2?
What does the answer mean?
answer
1. Find partial derivative of equation with respect to K (take derivative only paying attention to K)
2. Plug in K=25
3. Take MPL (partial derivative) with respect to L
4. Plug in 2
If we increase the amount of labor by one unit, output "q" will go up by __________ units.
2. Plug in K=25
3. Take MPL (partial derivative) with respect to L
4. Plug in 2
If we increase the amount of labor by one unit, output "q" will go up by __________ units.
question
What is the Law of Diminishing Marginal Returns?
answer
The marginal product of a variable input will eventually go down as a variable input increases while other inputs remain fixed
question
What is Average Product?
answer
The average amount of output produced by one unit of an input, holding all other inputs constant
question
What is the Average Product Function with respect to Labor?
answer
APL=f(L,K)/L or q/L
question
What is the Average Product Function with respect to Capital?
answer
APK=f(L,K)/K or q/K
question
What does an isoquant describe?
answer
all the combinations of inputs that can be used to produce the same quantity of output
question
What is an isoquant function?
What does this mean?
What does this mean?
answer
MRTS L,K= MPL/MPK= -change in K/change in L
How much of the inputs we can trade to still produce set amount of output
How much of the inputs we can trade to still produce set amount of output
question
What is the Marginal Rate of Technical Substitution?
answer
absolute value of the slope
question
Describe MRTS for Strictly Convex Isoquants.
answer
MRTS is going down, between 2 extreme cases. slope downwards
question
Describe MRTS for Linear Isoquants.
Perfect Substitutes or Perfect Compliments?
Perfect Substitutes or Perfect Compliments?
answer
MRTS is constant
Perfect Substitutes
Perfect Substitutes
question
Describe MRTS for L-Shaped Isoquants.
Perfect Substitutes or Perfect Compliments?
Perfect Substitutes or Perfect Compliments?
answer
MRTS is particular, input mix necessary for flexibility, at the kink
Perfect Compliments
Perfect Compliments
question
What is the variable for price of labor?
answer
W (wage)
question
What is the variable for price of capital?
answer
R (rent)
question
State the 2 Cost functions, Cost and Capital.
answer
C= wL + rK
K=(C/r) - (w/r)L
K=(C/r) - (w/r)L
question
Economic costs take _________________ into account.
answer
opportunity costs
question
Describe Cost Minimization Process for Strictly Convex Isoquants.
answer
Condition (C1): qtarget=f(L,K)
Condition (C2): optimal mix of L and K
MPL/MPK= w/r
Plug into cost function
Condition (C2): optimal mix of L and K
MPL/MPK= w/r
Plug into cost function
question
Describe Cost Minimization Process for Perfect Substitutes.
answer
Condition (C1): qtarget=f(L,K)
Condition (C2): optimal mix of L and K
MPL/MPK > w/r
(labor more important, use labor only)
MPL/MPK < w/r
(capital more important, use capital
only)
MPL/MPK = w/r
(any choice is optimal)
Plug into cost function
Condition (C2): optimal mix of L and K
MPL/MPK > w/r
(labor more important, use labor only)
MPL/MPK < w/r
(capital more important, use capital
only)
MPL/MPK = w/r
(any choice is optimal)
Plug into cost function
question
Describe Cost Minimization Process for Perfect Compliments.
answer
Condition (C1): qtarget=f(L,K)
Condition (C2): optimal mix of L and K
(cross multiply)
must be at the kink
(use given ratio to solve for L and K)
Plug into cost function
Condition (C2): optimal mix of L and K
(cross multiply)
must be at the kink
(use given ratio to solve for L and K)
Plug into cost function
question
What is price ratio?
answer
w/r
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