Chapter 11: The Firm and Its Economic Problem

Question 1

What is a firm and its goal to maximize profit?

Answer 1

• A firm is an institution that hires factors of production and organizes them to produce and sell goods and services.
• A firm’s goal is to maximize profit and if the firm fails to maximize its profit, the firm is either eliminated or taken over by another firm that seeks to maximize profit.

Question 2

What is the firm goal?

Answer 2

The firm’s goal is to maximize profit.

Question 3

What is the short run?

Answer 3

• The short run is a time frame in which the quantity of one or more resources used in production is fixed. For most firms, the capital, called the firm’s plant, is fixed in the short run.
  Other resources used by the firm such as labor, raw materials, and energy can be changed in the short run.
• Short-run decisions are easily reversed.

Question 4

What is the long run?

Answer 4

• The long run is a time frame in which the quantities of all resources—including the plant size can be varied.
• Long-run decisions are not easily reversed.

Question 5

What happens as the quantity of labor employed increases?

Answer 5

• The total product increases.
• The marginal product increases initially but eventually decreases.
• The average product increases initially but eventually decreases.

Question 6

What are the difference between the economics of scale, diseconomies of scale, and constant returns to scale?

Answer 6

• Economies of scale are features of a firm’s technology that lead to falling long-run average costs as output increases.
• Diseconomies of scale are features of a firm’s technology that lead to rising long-run average costs as output increases.
• Constant returns to scale are features of a firm’s technology that lead to constant long-run average costs as output increases.