Chapter 3 Part 1 Book Flashcards
With respect to the employment of inputs, it is important to recognize that analyzing marginal changes implies considering a small change in one input while holding what constant?
Holding employment of other inputs constant
(Profit maximization)
Two things should be noted about this constant search for enhanced profits…
1) a firm can make changes only in variables that are…?
2) because the firm is assumed to constantly search for profit-improving possibilities, our theory must address the….? Change that must be made almost daily.
1) within its control
2) small “marginal” change
The profit-maximizing firm will want to expand output by one unit of the added revenue from selling that unit is greater than..?
The added cost of producing it
As long as the marginal revenue from an added unit of output exceeds its marginal cost, the firm will continue to expand output
It will contract output whenever the marginal cost of production exceeds marginal revenue
Profits are maximized when?..
Marginal revenue equals marginal cost
A firm can expand or contract output only by altering its use of inputs.
These factors of production are?
Labor and capital
Marginal revenue
Additional revenue for the production of another good
The hiring decision of an employer
A) if the income generated by employing one more unit of an input exceeds the additional expense, then….?
B) if the income generated by one more unit of input is less than the additional expense…?
C) if the income generated by one more unit of input is equal to the additional expense….?
The hiring decision of an employer
A) if the income generated by employing one more unit of an input exceeds the additional expense, then add a unit of that input
B) if the income generated by one more unit of input is less than the additional expense, reduce employment if that input
C) if the income generated by one more unit of input is equal to the additional expense, no further changes in that input are desirable
Marginal product of labor
MP(little L)
The change in physical output produced by a change in the units of labor, holding capital constant
Marginal product of labor= change in physical output (divided by) a change in the units of labor
Marginal product
Change in physical output produced
Marginal revenue product
The marginal income produced by a unit of input
Marginal income
Marginal product (multiplied by) the marginal revenue product
If you have a guest appearance at a sporting event, it brings 20,000 more fans. You earn $25 per additional fan.
$25 X 20,000= $500,000
Marginal product of capital
MP(little K)
The change in output associated with a one-unit change in the stock of capital, holding labor constant
Marginal product of capital = change in output (divided by) change in stock of capital
The marginal revenue that is generated by an extra unit of output depends on the characteristics of the product market in which that output is sold.
Firm in purely Competitive Product Marketing=
-marginal revenue per unit of output sold is equal to..?
Firm with differentiated product (monopoly power) in product market=
-extra units of output can be sold only if..?
Firm in purely Competitive Product Marketing=
-marginal revenue per unit of output sold is equal to product price (P)
Firm with differentiated product (monopoly power) in product market=
-extra units of output can be sold only if product price is reduced (because the firm faces the market demand curve for its particular product) marginal revenue
The firms marginal revenue product of labor can be represented as:
MRP(L) = MP(L) * ?
-in the general case
MRP(L) = MP(L) * ?
-if the product market is competitive
MRP(L) = MP(L) * MR
-in the general case
MRP(L) = MP(L) * P
-if the product market is competitive
Changing the levels of labor or capital employed will add to or subtract from the firms..?
Total costs
The marginal expense of labor (ME(L)) that is incurred by hiring more labor is affected by the nature of competition in…?
The labor market
If the firm is in a competitive labor market and is a “wage taker”, then ME(L) is equal to..?
The market wage
They have labor supply curves that are horizontal at the going wage
If they hire an additional hour of labor, their costs increase by an amount equal to the wage rate, W
The simplest way to understand how the profit-maximizing behavior of firms generates a labor demand curve is to analyze the firms behavior over..?
Short run
In short run…
(With fixed capital)
- the firm needs to decide whether to alter its level of..?
- how to …….. Or …….. Output is not an issue because?
Output
Increase or decrease because only the employment of labor can be adjusted
-with capital fixed, a firms choice of output level and its choice of employment are 2 aspects of the same decision
Marginal product of labor
MP(L)
The change in the physical output of a firm when it changes its employment of labor by one unit, holding capital constant.
How many more additional cars can be sold if you hire another worker? That additional amount is the MP(L)
As more salesman are hired, MP(L) must fall
-law of diminishing returns
Law of diminishing marginal returns
As employment expands, each additional worker has a progressively smaller share of the capital stock to work with
Assume MP(L) is always decreasing
Profits are maximized, then, only when employment is such that any further one-unit change in labor would have a marginal revenue product equal to…?
Marginal expense
MRP(L) = ME(L)
MP(L) * P= ?
MP(L) = W/P states the profit-maximizing condition for hiring labor in terms of..?
W
Physical quantities
