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323 EXAM 2 Strickland TAMU > 323 Exam 2 Review > Flashcards

323 Exam 2 Review Flashcards

1
Q

What is the goal of producers?

A

Maximize profits, while minimizing costs

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2
Q

Production

A

process of turning inputs into outputs

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3
Q

Production function

A

describes the relationship between combinations of inputs and a firm’s output

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4
Q

In the short run what is fixed?

A

Capital is fixed- denoted by k bar

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5
Q

Marginal Product of Labor

A

the additional output that a firm can produce using an additional unit of labor (most important when making decisions)

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6
Q

Marginal Product of Labor formula

A

MPL = change in output / change in Labor

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7
Q

Average Product

A

average output per worker

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8
Q

Average product of labor formula

A

APL = output / labor (Q/L)

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9
Q

What is it called when the MPL falls as the number of L goes up?

A

Diminishing Marginal returns to labor

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10
Q

In the long run what is fixed?

A

Nothing

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11
Q

Benefits of nothing being fixed in the long run

A

firms can lessen the effects of diminishing marginal returns
firms can substitute between capital and labor

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12
Q

Isoquants

A

a curve representing all combinations of inputs that yield the same output

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13
Q

what does an isoquant further from the origin represent?

A

a higher level of output

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14
Q

Isoquants describe…

A

tradeoffs, captured by the slope
slope = change in K / Change in L

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15
Q

Marginal rate of technical substitution formula

A

MRTSlk = - (change in K / change in L) positive number

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15
Q

Marginal Rate of Technical Substitution

A

the negative slope of the isoquant

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16
Q

isoquants that are relatively straight represent what?

A

relative substitutes

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17
Q

Isoquants that are relatively curved represent what?

A

Relative complements

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18
Q

MRTSxy can also equal Marignal products,

A

MRTSxy = MPx / MPy

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18
Q

Perfect complement isoquants characterisitcs

A

Used in fixed proportion
General equation form: Q = min {ax,by}

Example. 2x and 1 y
Q = min {x,2y}
Q =1

happy with a units of y and b units of x. flip the numbers for it to make sense.

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19
Q

Perfect substitute isoquants characteristics

A

Subbed at a fixed rate
Genreal form; Q = ax+by

Example 1 x & 2Y
Q = x +2y

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20
Q

What is the isocost line?

A

a curve that shows all input combinations that yield the same cost

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21
Q

Equation for Isocost Line

A

C= WL + RK

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22
Q

Slope, X -intercept & Y-Intercept of Isocost Line

A

Slope = -W / R

X-int. = C / W

Y- int = C / R

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23
Q

Tangency Condition for Cost Minimization

A

MPL/W = MPK/ R
or
MRTSLK = W/R

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24
Q

What are the 3 types of Returns to scale, explain each

A

Constant- If I double Inputs, I get double Outputs
Increasing- If I double Inputs, I get quadruple outputs
Decreasing- If I double inputs, I get 1/2 outputs

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25
Q

What is total factor productivity growth?

Technological Advance

A

When output increases when inputs do not change- due to technological advances.

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26
Q

What are the assumptions of a firms production behaviors?

A

1.) The firm produces a singe good
2.) The firm has already chosen which product to produce
3.) For whatever quantity it produces, main goal is minimize cost
4.) Firm can only use 2 inputs, capital & labor
5.) In the short run, capital is fixed. In long run nothing is fixed
6.) More inputs used = more output produced
7.) can buy as much K&L as it wants at a fixed market price
8.) If there is a well functioning capital market, the firm does not have a budget constraint
9.) a firms production exhibits diminishing marginal returns to labor or capital

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27
Q

A firm wants to _______ its costs for production?`

A

Minimize

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28
Q

Accounting Cost

A

The explicit or direct costs of a business.

Examples- wage rate, rental rate, raw materials

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29
Q

Economic Cost

A

Accounting Cost + Opportunity Cost

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30
Q

Does Economic Profit = Accounting Profit

A

No!

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31
Q

Accounting Cost Formula

A

Sum of all costs (excluding sunk costs)

31
Q

Which type of profit should a firm pay attention to when making decisions?

A

Economic

32
Q

Economic Cost Formula

A

Accounting Cost + Opportunity Cost

33
Q

Fixed Cost (FC)

A

A type of cost that does not change with output. even when Q=0, firm must pay it.

33
Q

Fixed Cost formula

A

FC = TC-VC

34
Q

Variable Cost

A

a cost that changes depending on the output.

34
Q

Variable Cost Formula

A

VC = TC - FC

35
Q

Sunk Cost

A

costs that have already been paid and cannot be recovered. Sunk costs do not impact a firms decisions

Examples- Adverting spent on a firm, specific machinery for a firm, specific to that industry

35
Q

Average Fixed Cost Formula

A

AFC = TFC /Q

36
Q

Average Variable Cost Formula

A

AVC = TVC / Q

36
Q

Marginal Cost

A

the additional cost incurred from producing one more unit of output

36
Q

Average Total Cost Formula

A

ATC= TC / Q

37
Q

Marginal Cost Formula

A

MC= Change in TC / Change in Q

38
Q

Why is the slope of the AFC curve always downward sloping when Q is higher?

A

Because that fixed cost is divided by a larger Q.

39
Q

Marginal Cost is the slope off

A

Total cost curve or Variable cost curve

40
Q

Economies of scale

A

Total Cost Increase slower than output is increasing

41
Q

Economies of Scope formula

A

(Cost Produced Separate - Cost produced together) / (cost produced together)

42
Q

Constant Economies of Scale

A

Total cost & quantity increase at the same rate

43
Q

Diseconomies of scale

A

Total cost increase faster than output increases

43
Q

Perfect Competition Traits

A

Many firms
Homogenous/identical products
No barriers to entry or exit
price takers

43
Q

If economies of scope is greater than 0 what does this mean?

A

It is cheaper to produce a good together

44
Q

Economies of scope = 0.38, what does this mean?

A

It is 38% cheaper to produce the goods together

45
Q

What does it mean to be a price taker?

A

Individual firms are unable to influence the market price by altering the quantity produced.

ie. if they produce more they dont make more. They only get the market price.

46
Q

What does the demand curve look like for perfect competition?

A

Perfectly elastic, straight horizontal line

47
Q

Formula for Profit

A

Profit = Total Revenue - Total Costs

48
Q

When is profit maximized in Perfect Competition?

A

When P=MC

49
Q

When Price > MC what is happening (perfect comp.)

A

the firm is producing but losing money

50
Q

When P= MC what is happening? (perfect comp)

A

Profit is maximized

51
Q

When P < MC what is happening (perfect comp)

A

Producing and incurring a cost.

52
Q

Slope of the supply curve is always…. and why?

A

positive because the law of supply

As price goes up, Qs goes up as well

53
Q

What does each point on a supply curve represent

A

Producers Marginal willingness to sell

54
Q

Does a price shift move the whole supply curve?

A

NO, only a movement along the curve

55
Q

3 things that shift a supply curve

A

Change in number of producers (more = outward shift)
Cost of Inputs changing (cheaper = outward)
Pricing of outside option

56
Q

Price Elasticity of Supply Formula

A

% change in quantity supplied / % change in price

57
Q

When price elasticity of supply is high we say it is

A

Elastic |Es| > 1

58
Q

When price elasticity of supply is low we say it is

A

Inelastic
|Es| < 1

59
Q

If price elasticity of supply is 0 we say it is

A

Perfectly Inelastic

60
Q

When is a market in equlibrium

A

when Qd = Qs

61
Q

a shift in demand with a flatter supply curve results in…

A

a smaller change in price and a higher change in quantity for equilibrium

62
Q

a shift in demand with a steeper supply curve results in..

A

a higher change in price and a smaller change in quantity for equilibrium

63
Q

Welfare formula

A

W= Ps + Cs

64
Q

What causes markets to produce too little?

A

Price ceilings & floors
Quotas
Taxes
Market Power

65
Q

What causes markets to produce too much

A

Subsidies

66
Q

When Qd > Qs what occurs

A

market shortage

67
Q

When Qd = Qs what occurs

A

Market clearing / equilibrium

68
Q

When Qd < Qs what occurs

A

Market Surplus

69
Q

if profit is negative should a firm shut down?

A

No. Only shutdown if total revenue is less than VC.

TR<VC<– shut down

70
Q

What is producer surplus?

A

the benefit accrued to the producer from the sale of a product.

71
Q

Producer Surplus formula

A

Market Price - Willingness to Sell

323 EXAM 2 Strickland TAMU (1 decks)

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