Econ Chapter 5 Test Questions – Flashcards
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The production Function
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Mathematical function that defines the maximum amount of output that can be produced with a given set of inputs. π=πΉ(πΎ,πΏ)
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Define Q, K, L
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π is the level of output. πΎ is the quantity of capital input. πΏ is the quantity of labor input.
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Short Run Desicions
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Period of time where some factors of production (inputs) are fixed, and constrain a manager's decisions.
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Long Run Desicions
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Period of time over which all factors of production (inputs) are variable, and can be adjusted by a manager.
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Total Product (TP)
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Maximum level of output that can be produced with a given amount of inputs.
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Average product (AP)
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A measure of the output produced per unit of input.
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Average product of labor - π΄ππΏ
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Q / L
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Average product of capital - π΄ππΎ
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Q / K
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Marginal product (MP)
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The change in total product (output) attributable to the last unit of an input.
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Marginal product of labor - πππΏ
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βπ / βπΏ
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Marginal product of capital - πππΎ
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βπ/βπΎ
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ππππΏ Defintion
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Labor until the value of the marginal product of labor equals the wage rate
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ππππΏ Formula
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ππππΏ= π€ ππππΏ= π Γ πππΏ
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ππππΎ Defintion
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Capital until the value of the marginal product of capital equals the rental rate.
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ππππΎ Formula
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ππππΎ = π ππππΎ= π Γ πππΎ
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Linear Function
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π = ππΎ + ππΏ, where π and π are constants.
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Leontief Function
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π = πΉ (πΎ,πΏ) = min {ππΎ,ππΏ}, where π and π are constants.
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Cobb-Douglas Function
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π = πΉ (πΎ,πΏ) = πΎ^π πΏ^π, where π and π are constants.
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Linear Marginal Products Formula
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πππΎ = π and πππΏ = π
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Linear Average Products Formula
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π΄ππΎ = (ππΎ+ππΏ) / πΎ π΄ππΏ = (ππΎ+ππΏ) / πΏ
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Cobb-Douglas Marginal Products
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πππΎ = ππΎ^(πβ1)πΏ^π πππΏ = ππΎ^(πβ1)πΏ^π
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Cobb-Douglas Average Products
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π΄ππΎ = (πΎ^π πΏ^π) / πΎ π΄ππΏ = (πΎ^π πΏ^π) / πΏ
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Isoquants
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They capture the tradeoff between combinations of inputs that yield the same output in the long run, when all inputs are variable
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Marginal rate of technical substitutions
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- The rate at which a producer can substitute between two inputs and maintain the same level of output. - Absolute value of the slope of the isoquant.
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Marginal rate of technical substitutions Formula
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ππ
ππ(πΎπ) = πππΏ / πππΎ
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Cost Minimization
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Producing at the lowest possible cost.
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Cost Minimizing input Rule
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Produce at a given level of output where the marginal product per dollar spent is equal for all input: πππΏ / π€ = πππΎ / π Equivalently, a firm should employ inputs such that the marginal rate of technical substitution equals the ratio of input prices: πππΏ / πππΎ = π€ / π
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The Cost Function
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Mathematical relationship that relates cost to the cost-minimizing output associated with an isoquant.
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Average Costs
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Average fixed: π΄πΉπΆ = πΉπΆ / π Average variable costs: π΄ππΆ = ππΆ(π) / π Average total cost: π΄ππΆ = πΆ(π) / π
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Marginal cost
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The (incremental) cost of producing an additional unit of output. ππΆ = βπΆ / βπ
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Fixed Costs
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Cost that does not change with output.
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Sunk Costs
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Cost that is forever lost after it has been paid.
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Principle of Irrelevance of Sunk Costs
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A decision maker should ignore sunk costs to maximize profits or minimize loses.
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Economies of scale
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Declining portion of the long-run average cost curve as output increase.
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Diseconomies of scale
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Rising portion of the long-run average cost curve as output increases.
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Constant returns to scale
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Portion of the long-run average cost curve that remains constant as output increases.
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Economies of Scope
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Exist when the total cost of producing π_1 and π_2 together is less than the total cost of producing each of the type of output separately. πΆ (π1,0) + πΆ (0,π2 ) > πΆ (π1,π2 )
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Cost complementarity
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Exist when the marginal cost of producing one type of output decreases when the output of another good is increased. (βππΆ1 (π_1,π_2 )) / (βπ_2 ) < 0
