Chapter 3

Question 1

Factor of production

Answer 1

An input used to produce goods and services such as capital or labor

Question 2

Production function

Answer 2

The mathematical relationship that shows how the quantities of the factors of production determine the quantity of goods and services produced; Y = F(K, L)

Question 3

Constant returns to scale

Answer 3

A property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion

Question 4

Factor price

Answer 4

The amount paid for one unit of a factor of production

Question 5

Competition

Answer 5

A situation in which there are many individuals or firms, and the actions of any one of them do not influence market prices

Question 6

Profit

Answer 6

The income of firm owners; firm revenue minus firm costs

Question 7

Marginal product of labor (MPL)

Answer 7

The amount of extra output produced by an additional unit of labor

Question 8

Diminishing marginal product

Answer 8

A characteristic of a production function whereby the marginal product of a factor falls as the amount of the factor increases while all other factors are held constant

Question 9

Wage

Answer 9

The amount paid for one unit of labor

Question 10

Marginal product of capital (MPK)

Answer 10

The amount of extra output produced by an additional unit of capital

Question 11

Rental price of capital

Answer 11

The amount paid to rent one unit of capital

Question 12

How does a competitive, profit-maximizing firm decide how much labor to hire and how much capital to rent?

Answer 12

The firm demands each factor of production until that factor’s marginal product equals its real factor price

Question 13

Economic profit

Answer 13

The amount of revenue remaining for the owners of a firm after all the factors of production have been compensated

Question 14

Accounting profit

Answer 14

The amount of revenue remaining for the owners of a firm after all the factors of production except capital have been compensated

Question 15

How is the income of an economy distributed from firms to households?

Answer 15

Total output is divided between the payments to capital and the payments to labor, depending on their marginal productivities

Question 16

Cobb-Douglas production function

Answer 16

A production function of the form F(K, L) = AK^αL^1-α, where K is capital, L is labor, and A and α are parameters