Chapter 5 Flashcards
Marginal Product
The change in total output attributable to the last unit of an input
Value Marginal Product
The value produced by the last unit of output
Phases of Marginal Returns
as the usage of input increases, marginal product initially increases(increasing the marginal returns), then begins to decline( decreasing marginal returns), and eventually becomes negative (negative marginal returns)
Profit Maximizing Input Usage
To maximize profits, a manager should use inputs at levels at which the marginal benefit equals the marginal cost. More specifically when the cost of each additional unit of labor is w, the manager should continue to employ labor up to the point where VMP L= w in the range of diminishing marginal product
Isoquant
Defines the combination of inputs that yield the same level of output
Marginal Rate of Technical of Substitution
The rate at which a producer can substitute between two inputs and maintain the same level of output
Law of Diminishing Marginal Rate of Technical Substitution
A property of a production function stating that at less of one input is used, increasing amounts of another input must be employed to produce the same level of output
Isocost Line
A line that represents the combinations of inputs that will cost the producer the same amount of money
Optimal Input Substitution
To minimize the cost of producing a given level of output, the firm should use less of an output and more of other inputs when that input’s prices rises
Total Cost
Sum of fixed and variable costs
Fixed Costs
Costs that do not change with changes in output; includes the cost of fixed inputs used in production
Variable Costs
Costs that change with changes in output; includes the cost of inputs that vary with output
Marginal Cost
The cost of producing an additional unit of output
Irrelevance Of Sunk Costs
A Decision maker should ignore sunk costs to maximize profits or minimize losses
Economies of Scale
Exist when long-run average costs decline as output is increased
Diseconomies of Scale
Exist when long-run averages costs rise as output is increased
Constant Returns to Scale
Exist when long-run average costs remain constant as output is increased
What happens at the cost-minimizing input mix
the slope of the isoquant equals the the slope of the isocost
Change in Isocosts Principle
For given input prices, isocosts farther from the origin are associated with higher costs. Changes in input prices change the slope of isocost lines.
Slope of the isocost
-w/r
Optimality Conditions
MPL/w=MPK/r
MPL/MPK=w/r
Short Run Production Function
A function that defines the minimum possible cost of producing each output level when variable factors are employed in the cost-minimizing fashion
Cobb Douglas Function
A production function that assumes some degree of substitutability between inputs
Cost Minimizing Input Rule
-to minimize the cost of producing a given level of output , the marginal product per dollar should be equal for all inputs
MPL/w=MPk/r
-equivalently to minimize the cost of production a firm should employ inputs such that MRTS is equal to the ratio of input prices
Sunk Cost
A cost that is forever lost even after it is paid
Long-Run Average Cost Curve
A curve that defines minimum average cost of producing alternative levels of output allowing for optimal selection of both fixed and variable factors
The Optimality Condition for the Profit Maximizing Input Condition
VMPL=W
What happens to average fixed cost as output is expanded?
decreases…because there is more to spread it over
Discuss the relationship between marginal cost and marginal product?
inverese…..
Economic Costs vs Accounting Costs
- accounting costs are the cost most often associated with the cost of producing
ex. direct payments to labor and capital to produce output
Example of Variable and Fixed Factors
Variable:Labor and Steel
Fixed: New Assembly Line
p.172
………….
SRMC=
MPL
What’s fixed in the short-run?
capital
Isoquants are long-run or short-run?
LONG-RUN
MRTS is the absolute value of what?
slope of the isoquant
Points on the same isoquant have what in common?
-they produce the same output
Set up the graph with axises
……….the letters
What increases as the isoquants increase?
…..the production costs
Why might a company stop in stage 1 of the marginal return graph?
-market is not big enough
