Chapter 11: Behind the Supply Curve: Inputs and Costs

Question 1

Production Function

Answer 1

relationship between the quantity of inputs a firm uses and the quantity of output if produces

Question 2

Fixed Input

Answer 2

an input whose quantity is fixed

Question 3

Variable Input

Answer 3

input whose quantity can vary at any time

• ex/ workers
• ex/ in long run firms can adjust quantity of any input

Question 4

Total Product Curve

Answer 4

shows how quantity of output depends on the quantity of the variable input for a given quantity of of the fixed input

Question 5

Marginal Product

Answer 5

the additional quantity of output that is produced by one more unit of input.
-change in Q/ change in input

Question 6

Diminishing Returns to an Input

Answer 6

when an increase in the quantity of that input leads to a decline in the marginal product of that output

Question 7

Diminishing returns

Answer 7

only true if quantity of all other inputs is fixed

Question 8

Fixed Cost

Answer 8

cost that does not depend on the quantity of an output produced. Cost of the fixed input

Question 9

Variable Cost

Answer 9

cost that depends on the quantity of output produced. cost of the variable input.

Question 10

Total Cost

Answer 10

sum of the fixed cost and the variable cost of producing that quantity of ouput
TC = FC + VC

Question 11

Total Cost Curve

Answer 11

curve that shows how total cost depends on the quantity of that output
-upward sloping, gets steeper as it goes up

Question 12

Marginal Cost

Answer 12

change in total cost/ change in quantity of output

-slope of the total cost curve

Question 13

Average Total Cost (ATC)

Answer 13

TC/Q

• tells producer how much average “typical unit” of output costs to produce
• sum of AFC and AVC

Question 14

Average Fixed Cost (AFC)

Answer 14

FC/Q

Question 15

Average Variable Cost (AVC)

Answer 15

VC/Q

Question 16

Spreading Effect

Answer 16

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower AFC
-more powerful at low levels of input

Question 17

Diminishing Returns Effect

Answer 17

The larger the output, the greater the amount of variable input required to produce additional units leading to higher AVC
-more powerful at higher levels of output–> outweighs spreading effect

Question 18

Minimum-cost output

Answer 18

quantity of output at which total cost is lowest–> bottom of the “V”

• At this point:
  
  • ATC = MC
  • At output less than, MC < TC and ATC is falling
  • At output greater than, MC>TC and ATC is rising

Question 19

Short-Run vs. Long-run

Answer 19

• in long run –> fixed cost becomes variable firm can choose
• at any level of output –> tradeoff between lower FC and higher VC and vice versa
• in long-run –> higher FC leads to lower ATC and vice versa
• at levels decisions to be made
  
  • -> take in the tradeoffs

Question 20

Long-Run Average Total Cost Curve

Answer 20

shows relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
-how firms make decisions

Question 21

Increasing Returns to scale

Answer 21

when long-run average TC declines as output increases

-often due to specialization or technology

Question 22

Decreasing Returns to scale

Answer 22

when long-run average TC increases as output increases