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

Condition (C2): optimal mix of L and K

MPL/MPK= w/r

Plug into cost function

**,K**)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

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

**,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

question

Describe Cost Minimization Process for Perfect Compliments.

answer

Condition (C1): qtarget=f(L

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

**,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

question

What is price ratio?

answer

w/r