Chapter 4

Question 1

This section deals with understanding of the production function and explores its
relations to cost function. Information of these is the basis for organizational short run and long
run procurement and production scheduling.

Answer 1

Theory of the firm

Question 2

_____ in economic terms is generally understood as the transformation of inputs into
outputs. The inputs are what the firm buys, namely productive resources, and outputs are what it sells.

Answer 2

Production

Question 3

defined as producing goods which satisfy some human want

Answer 3

Production

Question 4

include resource inputs used to produce goods and services

Answer 4

Factors of production

Question 5

Four major categories of factors

Answer 5

Land
Labor
Capital
Entrepeneur

Question 6

occurring goods like water, air, soil, minerals, flora and fauna that are used in the creation of products.

Answer 6

Land-naturally

Question 7

The payment for use and the received income of a
land owner is rent.

Answer 7

Land-naturally

Question 8

human effort used in production which also includes technical and marketing expertise. The payment for someone else’s labor and all income received from one own labor is wages.

Answer 8

Labor

Question 9

classified as the physical and mental contribution of an employee to the production of the good(s)

Answer 9

Labor

Question 10

human-made goods which are used in the production of other goods. These include machinery, tools, and buildings.

Answer 10

Capital

Question 11

responsible in combining the other three factors of production.

Answer 11

Entrepreneur

Question 12

Name all the final goods and services

Answer 12

Factors of Production:
Land
Labor
Capital
Entrepreneur

Payment:
Rent
Wages/Salary
Interest Rate
Profit

Question 13

indicates the maximum amount of commodity ‘x’ to be produced from various combinations of input factors. It decides on the maximum output to be produced from a given level of input, and how much minimum input can be used to get the desired level of output. The ______________ assumes that the state of technology is fixed. If there is a change in technology then there would be change in production function.

Answer 13

Production function

Question 14

Two classification of inputs

Answer 14

Fixed inputs
Variable input

Question 15

Prodution function according to period of time

Answer 15

Short-run production function
Long-run production function

Question 16

It has its own constraints in producing more goods

Answer 16

Law of diminishing returns

Question 17

Same inputs: flexible, variable

Answer 17

Long-run production function

Question 18

Same inputs: fixed, limited

Answer 18

Short-run production function

Question 19

Can be readily change

Answer 19

Variable inputs

Question 20

Cannot be readily change

Answer 20

Fixed inputs

Question 21

the maximum level of output that can be produced with a given amount of input.

Answer 21

Total production (TP)

Question 22

output produced per unit of input

Answer 22

Average production

Question 23

the change in total output produced by the last unit of an input

Answer 23

Marginal product (MP)

Question 24

change in the quantity produced to a given change in the labor

Answer 24

Marginal production of labor

Question 25

change in the quantity produced to a given change in the capital

Answer 25

Marginal production of capital

Question 26

Both MP and AP will first ______ than _______ with MP becoming ______

Answer 26

Increase, decrease, negative

Question 27

When AP is ________, MP is ____ the average

Answer 27

Rising/ falling, Greater/ less than

Question 28

MP reaches its _____, before the peak of AP is _____

Answer 28

Peak, achieved

Question 29

At the peak of AP, AP is _____ to MP

Answer 29

Equal

Question 30

In the long run the fixed inputs like machinery, building and other factors will change along with the variable factors like labor, raw material etc. With the equal percentage of increase in input factors various combinations of returns occur in an organization. The change in percentage output resulting from a percentage change in all the factors of production. They are increasing, constant and diminishing ________.

Answer 30

Return to scale

Question 31

Name all the 3 types of returns to scale

Answer 31

1. Increasing return to scale 2. Decreasing return to scale 3. Constant return to scale

Question 32

if the output of a firm increases more than in proportionate to an increase in all inputs

Answer 32

Increasing return to scale

Question 33

if the output of a firm increases more than in proportionate to an increase in all inputs

Answer 33

Decreasing return to scale

Question 34

when all inputs are increased by a certain percentage the output increases by the same percentage.

Answer 34

Constant return to scale

Question 35

Two major categories of cost

Answer 35

Explicit cost (total cost) Implicit cost

Question 36

Refers to the actual cash outlay

Answer 36

Explicit cost

Question 37

Payment to the factors of production

Answer 37

Explicit cost

Question 38

Total peso expense even without an output produced

Answer 38

Fixed cost

Question 39

Expenditures that varies based on the output produce

Answer 39

Variable cost

Question 40

The additional cost incurred in additional unit of product produced

Answer 40

Marginal cost

Question 41

Synonymous to opportunity cost

Answer 41

Implicit cost

Question 42

the opportunity cost incurred when for an instance the owner of the factory employs the factor in one use rather than its best alternative cost.

Answer 42

Implicit cost

Question 43

There is a relationship between the volume or quantity created and sold and the resulting impact on __________________

Answer 43

Revenue function, cost function, profit function.

Question 44

This is calculated by dividing the total cost by the quantity

Answer 44

Average cost

Question 45

As the sales volume increases, revenue and cost increase and profit becomes progressively less negative, turns positive, and then becomes increasingly positive. There is a zone of lower volume levels where economic costs exceed revenues and a zone on the higher volume levels where revenues exceed economic costs.

Answer 45

Breakeven Analysis

Question 46

Are retrospective (past) costs that have already been incurred and cannot be recovered.

Answer 46

Sunk cost

Question 47

The price paid for a plant originally at the time of purchase.

Answer 47

Historical cost

Question 48

The price that would have to be paid currently for acquiring the same plant.

Answer 48

Replacement cost

Question 49

Is the addition to costs resulting from a change in the nature of level of business activity.

Answer 49

Incremental cost

Question 50

Change in cost caused by a given managerial decision

Answer 50

Incremental cost

Question 51

Total cost incurred by the society on account of production of a good or service.

Answer 51

Social cost

Question 52

The cost associated with the exchange of goods and services.

Answer 52

Transaction cost

Question 53

Decreasing long- run average cost of the company through the expansion of production capacity. It is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.

Answer 53

Economies of scale

Question 54

Derived partially from learning by doing

Answer 54

Economies of scale

Question 55

Four main categories of internal economies of scale

Answer 55

Technical economies Managerial economies Marketing economies Financial economies

Question 56

These arise mainly from increased specialization and indivisibilities. Larger firms can make use of more specialized equipment and labor in the production process, for example by using assembly lines.

Answer 56

Technical economies

Question 57

Large firms find it easier to attract and use more specialized managers, who are more skilled and productive at performing specific managerial functions.

Answer 57

Managerial economies

Question 58

These relate mainly to obtaining bulk discounts; by buying in bulk larger firms can often enable their suppliers to obtain the technical economies of scale above.

Answer 58

Marketing economies

Question 59

The most obvious factor here is that large firms can often borrow at a lower interest rate, because they have a better credit rating, representing a lower default premium.

Answer 59

Financial economies

Question 60

average cost reduction overtime due to production experience. It refers to improved production efficiencies stemming from the knowledge gained through production experience.

Answer 60

Learning curve

Question 61

keeping employees motivate to stay in their workplace, rather than seek employment in outside.

Answer 61

Minimize turn-over

Question 62

Cost reduction from producing complementary products

Answer 62

Economies of slope