Chap 6 - Firms & Production

Question 1

Limited Liability

Answer 1

Condition whereby the personal assets fo the owners of the corporation cannot be taken to pay a corporation’s debts it it goes into bankruptcy.

Question 2

Profit

Answer 2

The difference between Revenues, R, and costs, C; pi = R - C

Question 3

Efficient Production or Technological Efficiency

Answer 3

Situation in which the current level of output cannot be produced with fewer inputs, given existing knowledge about technology and the organization of production.

Question 4

Production Function

Answer 4

The relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organization.

Question 5

Shot Run

Answer 5

A period of time so brief that at least one factor of production cannot be varied practically

Question 6

Fix Input

Answer 6

a factor of production that can be varied practically int he short run

Question 7

Variable Input

Answer 7

a factor of production whose quantity can be changed readily by the firm during the relevant time period.

Question 8

Long Run

Answer 8

a lengthy enough period of time that all inputs can be varied.

Question 9

Marginal Product of Labor (MPL)

Answer 9

The change in total output, resulting from using an extra unit of labor, holding other factors constant.

Question 10

Average Product of Labor (APl)

Answer 10

The ratio of output to the number of workers used to produce that output.

Question 11

Isoquant

Answer 11

a curve that shows the efficient combinations of labor and capital that can produce a single level of output

Question 12

Three properties of Isoquants

Answer 12

1. ) The farther an isoquant from the origin, the greater the level of output.
2. ) Isoquants do not cross.
3. ) Isoquants slope downward.

Question 13

Marginal Rate of Technical Substitution (MRTS)

Answer 13

The number of extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant.

Question 14

Constant Returns to Scale (CRS)

Answer 14

Property of a production function whereby when all inputs are increased by a certain percentage, output increases by that same percentage.

f(2L,2K) = 2f(L,K) = 2q

Question 15

Increasing Returns to Scale (IRS)

Answer 15

Property of a production function whereby output rises more than in proportion to an equal increase in all outputs.

f(2L,2K) > 2f(L,K) = 2q

Question 16

Decreasing Returns to Scale (DRS)

Answer 16

Property of a production function whereby output increases less to an equal percentage increase in all inputs.

f(2L,2K)

Question 17

Technical Progress

Answer 17

An advance in knowledge that allows more output to be produced with the same level of outputs.

Question 18

What are three of the big decisions that firms need to make?

Answer 18

1. ) How a firm is owned and managed?
2. ) Firm must decide how to produce.
3. ) If a firm wants to expand output, it must decide how to do that in both the short run and the long run.
4. ) Given its ability to change its output level, a firm must determine how large to grow.

Question 19

Production

Answer 19

A firms converts inputs into outputs using on e of the available technologies.

Question 20

What are the three broad categories of inputs, generally?

Answer 20

1. ) Capital (K): Long lived inputs such as land, buildings (factories, stores), and equipment (machines, trucks).
2. ) Labor (L): Human services such as those provided by managers, skilled workers (architcts, economists, engineers, plumbers), and less-skilled workers (custodians, construction laborers, assembly-line workers).
3. ) Materials (M) Raw goods (oil, water, wheat) and processed products (aluminum, plastic, paper, steel).

Question 21

What kind of condition is efficient production for profit maximization?

Answer 21

1. ) Efficient production is a necessary condition for profit maximization.
2. ) But efficient production alone is not a sufficient condition to ensure that a firm’s profits are maximized.

Question 22

How long it takes for all inputs to be variable depends…

Answer 22

on the factors a firm uses

Question 23

The relationship between output or total production can be illustrated by …

Answer 23

using a particular production function.

Question 24

Law of Diminishing Marginal Returns

Answer 24

holds that if a firm keeps increasing an input, holding all other inputs and technology constant, the corresponding increase in output will become smaller eventually.
- That is if only one input is increased, the marginal product of that input will diminish eventually.

Question 25

What has a geometric interpretation in terms of the total product curve?

Answer 25

The Marginal Product of Labor (pg. 161)

Question 26

With greater specialization…

Answer 26

workers are assigned to tasks at twhich they are especially adept , and time is saved by not having workers move from task to task.

Question 27

The three curves are geometrically related.

Answer 27

1. ) The relationship between the average and marginal product of labor curves.
2. ) The relationship between the total product curve and the two other curves.

Question 28

How to understand average product of labor curve when its sloping upward in relation to the Marginal Product of Labor Curve being above or below it?

Answer 28

The average product of labor curve slopes upward where the marginal product of labor curve slopes upward where the marginal product of labor curve is above it and slopes downward where the marginal product curve is below it?

Question 29

What is stronger, to say there are diminishing returns or diminishing marginal returns?

Answer 29

Diminishing returns.

Question 30

What is a common mistake in terms of claiming that marginal products must fall as we increase an input without requiring that technology and other inputs stay constant?

Answer 30

If we increase labor while simultaneously increasing other factors or adopting superior technologies, the marginal product of labor may rise indefinitely.

Question 31

Can a firm substitute from one input to another while maintaining the same level of output?

Answer 31

Yes, this is much like maintaining utility for a consumer along an indifference curve.

Question 32

What are the three major properties of isoquants, that arise predominately from firms’ producing efficiently?

Answer 32

1. ) The farther an isoquant is form the origin, the greater the level of output.
2. ) Isoquants do not cross
3. ) Isoquants slope downward
   (pg. 165)

Question 33

What does the curvature of an isoquant show?

Answer 33

How readily a firm can substitute from one input to another.

Question 34

If the inputs are perfect substitues, each isoquant is…

Answer 34

a straight line

Question 35

What type of production function requires that inputs must be used in fixed proportions?

Answer 35

A fixed-proportion production function

q = x + y

Question 36

What does the declining MRTS along an isoquant illustrate?

Answer 36

This decline in the MRTS (in absolute football) along an isoquant as the firm increases labor illustrates diminishing marginal rates of technical substitution.
- The curvature of the isoquant away from the origin reflects diminishing marginal rates of technical substitution.

Question 37

What does the marginal rate of technical substitution (the degree to which inputs can be substituted for each other) equals..

Answer 37

equals the ratio of the marginal product of labor to the marginal product of capital.

Question 38

For a Cobb-Douglas production function what do the constants determine?

Answer 38

The constants determine the relationships between the marginal and average products of labor and capital.

Question 39

What are some reasons for decreasing returns to scale?

Answer 39

1. ) The difficulty of organizaing, coordinating, and integrating activities with firm size.
2. ) Large teams of workers may not function as well as small teams, n which each individual takes greater personal responsibility.

Question 40

Even is each firm in a market produces as efficiently as possible …

Answer 40

firms may not be equally productive - one firm may be able to produce more than another from a given amount of inputs.

Question 41

How can we measure the relative productivity of a firm?

Answer 41

By expressing the firm’s actual output, q. as a percentage of the output that the most productive firm in the industry have produced, q, from the same amount of inputs: 100q/q

Question 42

Nonneutral technical changes

Answer 42

are innovations that alter the proportion in which inputs are used.

Question 43

Better management or organization of the production process

Answer 43

allows the firm to produce more output from given levels of output

Question 44

The Spacing of the Isoquants determines…

Answer 44

the returns to scale.

Question 45

Are isoquants always non linear?

Answer 45

Isoquants can be linear when inputs are perfectly substitutable, and thus it is not the case that they are always non-linear.

Question 46

In the long run, firms should decide to shut down if what condition holds?

Answer 46

Price is less than both average cost and average variable cost.

Question 47

In the long run, what cost measure is minimized?

Answer 47

Average Cost

- In the long-run, average cost is minimized and the equilibrium is found where price equals minimum average costs.

Question 48

Which of the following is a reason that the long-run supply curve may not be flat and may instead be upward-sloping?

Answer 48

Firms are different (i.e., some have lower costs than others).

• Entry is limited.
• Input prices increase with output.