question
What are the three main decisions made by many firms
answer
-How to produce
-How many people to employ
- How much and what type of capital equipment to use
-How many people to employ
- How much and what type of capital equipment to use
question
_______ is every firms main incentive behind decision making, and each decision can be organized into two time frames: the ____ run and the ___ run
answer
Profit maximization
Short run; long run
Short run; long run
question
short run
answer
-Capital (Plant): fixed
-Labor/raw material/energy: variable(can be changed)
-decisions can be easily reversed
-Labor/raw material/energy: variable(can be changed)
-decisions can be easily reversed
question
Long run & sunk cost
answer
-The quantities of all resources can be varied
- not easily reversed
Sunk Cost: a cost incurred by the firm and cannot be changed.
- not easily reversed
Sunk Cost: a cost incurred by the firm and cannot be changed.
question
To increase ____ in the ____run a firm must ____ the amount of labor employed since capital is ____
answer
Output
Short
Increase
fixed
Short
Increase
fixed
question
What are the concepts that describe the relationship between output and the quantity of labor employed? Describe them.
answer
Total product: the total output produced in a given period
Marginal product of labor: the change in total product because of a one unit increase in the quantity of labor employed
Average product of labor: is equal to total product divided by the quantity of labor employed
Marginal product of labor: the change in total product because of a one unit increase in the quantity of labor employed
Average product of labor: is equal to total product divided by the quantity of labor employed
question
Short run:
As the quantity of labor employed increases...
As the quantity of labor employed increases...
answer
-Total product increases
-Marginal product increases initially and then decreases eventually
-Average product increases initially but decreases eventually
-Marginal product increases initially and then decreases eventually
-Average product increases initially but decreases eventually
question
Product curves
answer
Product curves show how the firm's total product, marginal product, and average product change as the firm varies the quantity of labor employed.
question
Total product curve
answer
Definition: It separates attainable output levels from unattainable output levels in the short run.
calculation: total output from each additional worker
Graph: similar to the PPF curve, upward sloping, gets flatter towards the top, marginal product is its slope, attainable area to the right of the curve
why: The height of each bar measures the marginal product of labor, which is why the output from each additional worker decreases
calculation: total output from each additional worker
Graph: similar to the PPF curve, upward sloping, gets flatter towards the top, marginal product is its slope, attainable area to the right of the curve
why: The height of each bar measures the marginal product of labor, which is why the output from each additional worker decreases
question
Marginal Product of labor curve
answer
Definition: is the change in output that results from employing an added unit of labor.
Calculation: equals the change in the total number of units produced divided by the change in a single variable input
Graph: sideways question mark, increases then decreases, increasing marginal returns, then decreasing
explanation: the initial addition of workers is productive and increases output but as it gets crowded the output of each additional worker becomes less and less
Calculation: equals the change in the total number of units produced divided by the change in a single variable input
Graph: sideways question mark, increases then decreases, increasing marginal returns, then decreasing
explanation: the initial addition of workers is productive and increases output but as it gets crowded the output of each additional worker becomes less and less
question
_____ marginal returns arise from increased specialization and division of labor.
answer
increasing
question
_____marginal returns arises because each additional worker has less access to capital and less space in which to work.
answer
decreasing
question
The law of diminishing returns states
answer
As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes.
question
Average product curve
answer
Definition: the average output (or products) produced by each input (factors of production like labor and land)
Calculation: total product / # labor employed
graph: Mirrors the shape of the marginal product curve but does not go quite as high or low
explanation: it will not be extreme because it is an average, the point of intersection between the average product curve and the marginal product curve is where the slopes begin to decline
Calculation: total product / # labor employed
graph: Mirrors the shape of the marginal product curve but does not go quite as high or low
explanation: it will not be extreme because it is an average, the point of intersection between the average product curve and the marginal product curve is where the slopes begin to decline
question
When marginal product ____ average product, average product is at its _____.
answer
equals
maximum
maximum
question
To produce more _____ in the short run, the firm must employ more labor, which means that it must increase its ____.
answer
output
costs
costs
question
Three cost concepts and three types of cost curves are.... describe them
answer
Total cost: cost of all resources used; total fixed cost is the cost of the firms fixed inputs- does not change with output, total variable costs is the cost of the firms variable inputs, they do not change with output
Marginal cost:
Average cost
Marginal cost:
Average cost
question
Total cost curve
answer
definition: graph of the costs of production as a function of total quantity produced.
calculation: TC = TFC + TVC
graph: upward sloping, increases as output increases, higher than TVC and TFC, TVC increases as output increases, TFC is the same at each output level
why: because it is fixed cost + variable costs
calculation: TC = TFC + TVC
graph: upward sloping, increases as output increases, higher than TVC and TFC, TVC increases as output increases, TFC is the same at each output level
why: because it is fixed cost + variable costs
question
Marginal cost
answer
definition: the increase in total cost that results from a one-unit increase in total product.
question
Over the output range with increasing marginal returns, marginal cost ____ as output increases
answer
falls
question
Over the output range with diminishing marginal returns, marginal cost ___ as output increases.
answer
rises
question
Average cost
answer
Calculation: total cost (TC) divided by the number of unit of a good produced (the output Q): It is also equal to the sum of average variable costs (total variable costs divided by Q) and average fixed costs (total fixed costs divided by Q).
-Average fixed cost (AFC) is total fixed cost per unit of output.
- Average variable cost (AVC) is total variable cost per unit of output.
-Average total cost (ATC) is total cost per unit of output.
ATC= AFC+AVC
-Average fixed cost (AFC) is total fixed cost per unit of output.
- Average variable cost (AVC) is total variable cost per unit of output.
-Average total cost (ATC) is total cost per unit of output.
ATC= AFC+AVC
question
The AFC curve shows that average fixed cost____ as output ____.
answer
falls
increases
increases
question
The Average variable cost curve is ____. As output ____average variable cost falls to a minimum and then increases
answer
u-shaped
increases
increases
question
the average total cost cost curve is ____
answer
u-shaped
question
the MC curve:
For outputs over which Average Variable Cost is falling , Marginal Cost is ____ Average Variable Cost
For outputs over which Average Variable Cost is falling , Marginal Cost is ____ Average Variable Cost
answer
below
question
The MC curve:
For outputs over which AVC is rising, MC is ____AVC.
For outputs over which AVC is rising, MC is ____AVC.
answer
above
question
the MC curve:
For the output at minimum AVC, MC ____ AVC.
For the output at minimum AVC, MC ____ AVC.
answer
equals
question
While Average Total Cost is falling Marginal Cost is _____Average Total Cost
answer
below
question
For the outputs over which ATC is_____, MC is above ATC.
answer
rising
question
For the output at minimum ATC, MC _____ ATC.
answer
equals
question
The AVC curve and ATC curve is U-shaped because:
answer
Initially, Marginal Product exceeds Average Product, which brings rising Average Product and falling AVC.
Eventually, MP falls below AP, which brings falling AP and rising AVC.
Eventually, MP falls below AP, which brings falling AP and rising AVC.
question
ATC falls at _____output levels because AFC is falling quickly.
answer
low
question
Why the average total cost curve is u-shaped
answer
definition: The ATC curve is the vertical sum of the AFC curve and the AVC curve.
reason it is u shaped:
-Spreading total fixed cost over a larger output—AFC curve slopes downward as output increases.
-Eventually diminishing returns—the AVC curve slopes upward and AVC increases more quickly than AFC is decreasing.
reason it is u shaped:
-Spreading total fixed cost over a larger output—AFC curve slopes downward as output increases.
-Eventually diminishing returns—the AVC curve slopes upward and AVC increases more quickly than AFC is decreasing.
question
when output is plotted against labor
answer
total product curve
question
when output is plotted against variable cost
answer
TVC curve but flipped
question
cost curves and product curves are linked:
MC is at its minimum at the same output level at which MP is at its ____.
MC is at its minimum at the same output level at which MP is at its ____.
answer
max
question
cost curves and product curves are linked:
When MP is rising, MC is _____
When MP is rising, MC is _____
answer
falling
question
cost curves and product curves are linked:
AVC is at its minimum at the same output level at which AP is at its _____.
AVC is at its minimum at the same output level at which AP is at its _____.
answer
max
question
cost curves and product curves are linked:
When AP is rising, AVC is _____
When AP is rising, AVC is _____
answer
falling
question
The position of a firm's cost curves depends on two factors:
answer
Technology
Prices of factors of production
Prices of factors of production
question
An increase in productivity shifts the product curves _____and the cost curves _____.
answer
up
down
down
question
If a technological advance results in the firm using more capital and less labor,
answer
fixed costs increase and variable costs decrease.
In this case, average total cost increases at low output levels and decreases at high output levels.
In this case, average total cost increases at low output levels and decreases at high output levels.
question
Technological change influences both the product curves and the cost curves.
An increase in the price of a factor of production increases costs and shifts the cost curves.
An increase in the price of a factor of production increases costs and shifts the cost curves.
answer
true
question
An increase in a fixed cost shifts the total cost (TC ) and average total cost (ATC ) curves upward but does not shift the marginal cost (MC ) curve.
answer
T
question
An increase in a variable cost shifts the total cost (TC ), average total cost (ATC ), and marginal cost (MC ) curves upward.
answer
T
question
The firm's production function is the relationship between the maximum output attainable and the quantities of both capital and labor.
answer
t
question
As the size of the plant increases, the output that a given quantity of labor can produce increases.
But for each plant, as the quantity of labor increases, diminishing returns occur.
But for each plant, as the quantity of labor increases, diminishing returns occur.
answer
t
question
The marginal product of capital is the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labor employed.
answer
t
question
A firm's production function exhibits diminishing marginal returns to labor (for a given plant) as well as diminishing marginal returns to capital (for a quantity of labor).
For each plant, diminishing marginal product of labor creates a set of short run, U-shaped cost curves for MC, AVC, and ATC.
For each plant, diminishing marginal product of labor creates a set of short run, U-shaped cost curves for MC, AVC, and ATC.
answer
t
question
The larger the plant, the greater is the output at which ATC is at a minimum.
answer
t
question
The long-run average cost curve is made up from the lowest ATC for each output level.
So, we want to decide which plant has the lowest cost for producing each output level.
So, we want to decide which plant has the lowest cost for producing each output level.
answer
t
question
The long-run average cost curve is the relationship between the lowest attainable average total cost and output when both the plant and labor are varied.
The long-run average cost curve is a planning curve that tells the firm the plant that minimizes the cost of producing a given output range.
The long-run average cost curve is a planning curve that tells the firm the plant that minimizes the cost of producing a given output range.
answer
t
question
Economies of scale are features of a firm's technology that lead to falling long-run average cost as output increases.
Diseconomies of scale are features of a firm's technology that lead to rising long-run average cost as output increases.
Constant returns to scale are features of a firm's technology that lead to constant long-run average cost as output increases.
Diseconomies of scale are features of a firm's technology that lead to rising long-run average cost as output increases.
Constant returns to scale are features of a firm's technology that lead to constant long-run average cost as output increases.
answer
t
question
Minimum efficient scale is the smallest quantity of output at which the long-run average cost reaches its lowest level.
If the long-run average cost curve is U-shaped, the minimum point identifies the minimum efficient scale output level.
If the long-run average cost curve is U-shaped, the minimum point identifies the minimum efficient scale output level.
answer
t
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