Chap. 6 - Production Theory

Question 1

In order for a firm to produce what must be employed?

Answer 1

Land, Labor, Capital, Entrepreneurship

Question 2

What is Total and Marginal Product?

Answer 2

Total product is simply the output that is produced by all of the employed workers.
Marginal product is the additional output that is generated by an additional worker.

Question 3

If Marginal Product is increasing what is happening with Total Product?

Answer 3

Total Product is increasing at an increasing rate.

Question 4

What is the equation for Marginal Product?

Answer 4

MP = ∆TP/∆L (change in TP/change in Labor)

Question 5

What is the law of diminishing marginal returns?

Answer 5

It states that as successive amounts of the variable input, i.e., labor, are added to a fixed amount of other resources, i.e., capital, in the production process the marginal contribution of the additional variable resource will eventually decline.

Question 6

When Marginal Product begins to fall, but is still positive what happens with Total Product?

Answer 6

Total Product is still increasing but at a decreasing rate.

Question 7

Where would an employer want to produce, in terms of Marginal and Total Product.

Answer 7

We know that we would not stop in the region where marginal product is increasing and we would not produce in the region where marginal product is negative. Thus we will produce where marginal product is decreasing but positive, for Total Product usually in the range where TP is increasing but at a decreasing rate.

Question 8

What are the equations for Total Product, Marginal Product and Average Product.

Answer 8

TP = Summation of Marginal Product
MP = change in TP/change in Labor
AP = TP/L

Question 9

What are explicit and implicit costs?

Answer 9

Explicit costs are out-of-pocket expenses, such as payments for rent and utilities, and implicit costs reflect the opportunity costs of not employing the resource in the next best option.

Question 10

What is a normal profit?

Answer 10

A normal profit is the minimum return to maintain a resource in its current use.

Question 11

Using the information below, compute the explicit and implicit costs, the accounting and economic profits.
Total Revenue $600,000
Cost of materials $200,000
Wages to employees $250,000
Foregone wage $100,000
Foregone rent and interest $80,000
Then explain what will happen in this industry and why.

Answer 11

Explicit = 200,000 + 250,000 = $450,000
Implicit = $100,000 + $80,000 = $180,000
Acct. Profit = 600,000 - 450,000 = 150,000
Econ Profit = 150,000 - 180,000 = -30,000
Although the business owner is earning an accounting profit of $150,000, her economic profit is negative meaning that she could earn more by shutting down the business and employing the resources in their next best alternative. Thus if this loss continues, we would anticipate the owner would exit this business.

Question 12

In the short run at least one cost is _____, while in the long run all costs are ______.

Answer 12

Fixed

Variable

Question 13

As production increases, total variable costs _______ at a decreasing rate. Why?

Answer 13

Increases

The marginal product for each additional worker is increasing.

Question 14

With diminishing marginal product, the total variable cost ________ at an increasing rate. Why?

Answer 14

Increases

The marginal product for each additional worker is decreasing.

Question 15

What is the equation for Total Cost?

Answer 15

TC = FC + VC

Question 16

Describe the TC, FC, VC on a graph.

Answer 16

On the y axis there is price, on the x axis there is quantity. Total Fixed costs is a horizontal line.Total variable cost increases at a decreasing rate then increases at an increasing rate due to marginal product. TC mimics VC but is shifted up by the amount of FC.

Question 17

What are the equations for MC, TC, ATC, AFC, AVC, ATC?

Answer 17

MC = change in TC/change in Q or change in TVC/change in Q
TC = TFC + TVC
ATC = TC/Q
AFC = TFC/Q
AVC = TVC/Q
ATC = AFC + AVC

Question 18

Marginal Cost intersects Average Variable cost and Average Total Costs where?

Answer 18

MC intersects them both at their minimums.

Question 19

When marginal product is at a _____, then marginal cost must be at a ______.
When marginal product is ______, the marginal cost of producing another unit of output is _______ and when marginal product is ______ marginal cost is ______.

Answer 19

peak/maximum
minimum
rising
declining
declining
rising

Question 20

When average product is _____, average variable cost is _____, and when average product is _____, average variable cost is _____.

Answer 20

rising
falling
falling
rising

Question 21

When total product is increasing at an ________ rate the total cost is increasing at a ________ rate. When total product is increasing at a ________ rate, the total cost is increasing at an _______ rate.

Answer 21

increasing
decreasing
decreasing
increasing

Question 22

Assuming all factors are variable, the long run average cost curve shows what? How is it obtained?

Answer 22

The minimum average cost of producing any given level of output.
It is obtained by combining the possible short-run curves (i.e. it is obtained by combining all possible plant sizes).

Question 23

What is economies of scale?

Answer 23

Increasing output reduces the per unit cost.

Question 24

What are some of the reasons for this?

Answer 24

As plant capacity increases, firms are able to specialize their labor and capital to a greater degree. Spreading out of the design and start up costs over a greater output amount. Bulk Purchasing.

Question 25

What is the minimum efficient scale?

Answer 25

The plant size (or scale of operation) that a firm must reach to obtain the lowest average cost or exhaust all economies of scales.

Question 26

What are constant and diseconomies of scale?

Answer 26

The region where long run average costs remain unchanged as plant size increases is known as constant returns to scale. Diseconomies of scale occurs when average costs increase as plant size increases.

Question 27

What is economies of scope?

Answer 27

Lowers the per unit cost as the range of products produced increases.