2.1 (Producer Behaviour)

Question 1

Define production set?

Answer 1

The set of all combinations of inputs and outputs that comprise a technologically feasible way to produce

Question 2

What does a representative firm do?

Answer 2

Uses inputs to produce outputs

Question 3

What does a production set show?

Answer 3

The technological choices facing a firm

Question 4

What does a technological constraint represent?

Answer 4

It represents the fact that only certain combinations of inputs can feasibly be used to produce a given amount of output

Question 5

Draw production set diagram

Answer 5

Now (notes)

Question 6

What does it mean for a point (x,y) to be in the production set?

Answer 6

It means that it’s technologically possible to produce y output with x amount of input

Question 7

Define production function?

Answer 7

The maximum possible output that a representative firm can produce from a given amount of input (rational, π max. firm will seek to be on this)

Question 8

What is an isoquant? Draw one?

Answer 8

An isoquant shows combinations of capital and labour that can produce a given level of output

See notes for diagram

Question 9

What are the 3 assumptions regarding technology?

Answer 9

Monotonic/free disposal
Convex
Long term and short term (LT all FofP can vary, ST some are fixed)

Question 10

Explain the monotonic/free disposal assumption?

Answer 10

A firm can have as many inputs as may be, as the disposal is free

Question 11

Explain the convex assumption?

Answer 11

If there are two ways of producing the same output, then their weighted average will produce at least this output

Question 12

Define marginal product?

Answer 12

The additional output that can be produced by employing one more unit of that input, holding all other inputs constant

Question 13

How can you tell that marginal product of K or L has a diminishing rate?

Answer 13

Find derivative of it wrt either K or L and if less than 0 then diminishing

Question 14

Define technical rate of substitution?

Answer 14

Slope of isoquant; it measures how much the firm has to increase one input in order to give up some of the other input

Question 15

What is the significance of diminishing TRS?

Answer 15

The absolute value of TRS decreases as one of the FofP is increased, meaning the isoquant are convex

Question 16

See marginal product but in notes p2 halfway down

Answer 16

Now

Question 17

What are returns to scale?

Answer 17

Returns to scale describes how output changes if all input levels change by the same proportion

Question 18

See and learn returns to scale diagram and check I know equations bit too

Answer 18

Notes

Question 19

Note:

Answer 19

A technology may ‘locally’ exhibit different returns to scale (draw diagram)

Question 20

Look

Answer 20

To produce an output, a firm needs a fixed ratio of the two inputs tf right angle isoquants

Question 21

What are cobb-Douglas productions functions?

Answer 21

Well behaved

Question 22

Prove the TRS equation?

Answer 22

See notes

Question 23

How do CD production functions work wrt returns to scale? (ie. f(tk, tl) = ?

Answer 23

see notes

Question 24

Explain technological progress and how it affects isoquants?

Answer 24

As superior prod. techniques develop, the same level of output can be produced with fewer inputs tf isoquant shifts inwards

Question 25

See

Answer 25

notes just above 2.2 profit max behaviour