Chapter 5

Question 1

Marginal Product

Answer 1

The change in total output attributable to the last unit of an input

Question 2

Value Marginal Product

Answer 2

The value produced by the last unit of output

Question 3

Phases of Marginal Returns

Answer 3

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)

Question 4

Profit Maximizing Input Usage

Answer 4

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

Question 5

Isoquant

Answer 5

Defines the combination of inputs that yield the same level of output

Question 6

Marginal Rate of Technical of Substitution

Answer 6

The rate at which a producer can substitute between two inputs and maintain the same level of output

Question 7

Law of Diminishing Marginal Rate of Technical Substitution

Answer 7

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

Question 8

Isocost Line

Answer 8

A line that represents the combinations of inputs that will cost the producer the same amount of money

Question 9

Optimal Input Substitution

Answer 9

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

Question 10

Total Cost

Answer 10

Sum of fixed and variable costs

Question 11

Fixed Costs

Answer 11

Costs that do not change with changes in output; includes the cost of fixed inputs used in production

Question 12

Variable Costs

Answer 12

Costs that change with changes in output; includes the cost of inputs that vary with output

Question 13

Marginal Cost

Answer 13

The cost of producing an additional unit of output

Question 14

Irrelevance Of Sunk Costs

Answer 14

A Decision maker should ignore sunk costs to maximize profits or minimize losses

Question 15

Economies of Scale

Answer 15

Exist when long-run average costs decline as output is increased

Question 16

Diseconomies of Scale

Answer 16

Exist when long-run averages costs rise as output is increased

Question 17

Constant Returns to Scale

Answer 17

Exist when long-run average costs remain constant as output is increased

Question 18

What happens at the cost-minimizing input mix

Answer 18

the slope of the isoquant equals the the slope of the isocost

Question 19

Change in Isocosts Principle

Answer 19

For given input prices, isocosts farther from the origin are associated with higher costs. Changes in input prices change the slope of isocost lines.

Question 20

Slope of the isocost

Answer 20

-w/r

Question 21

Optimality Conditions

Answer 21

MPL/w=MPK/r

MPL/MPK=w/r

Question 22

Short Run Production Function

Answer 22

A function that defines the minimum possible cost of producing each output level when variable factors are employed in the cost-minimizing fashion

Question 23

Cobb Douglas Function

Answer 23

A production function that assumes some degree of substitutability between inputs

Question 24

Cost Minimizing Input Rule

Answer 24

-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

Question 25

Sunk Cost

Answer 25

A cost that is forever lost even after it is paid

Question 26

Long-Run Average Cost Curve

Answer 26

A curve that defines minimum average cost of producing alternative levels of output allowing for optimal selection of both fixed and variable factors

Question 27

The Optimality Condition for the Profit Maximizing Input Condition

Answer 27

VMPL=W

Question 28

What happens to average fixed cost as output is expanded?

Answer 28

decreases…because there is more to spread it over

Question 29

Discuss the relationship between marginal cost and marginal product?

Answer 29

inverese…..

Question 30

Economic Costs vs Accounting Costs

Answer 30

• accounting costs are the cost most often associated with the cost of producing
  ex. direct payments to labor and capital to produce output

Question 31

Example of Variable and Fixed Factors

Answer 31

Variable:Labor and Steel
Fixed: New Assembly Line

Question 32

p.172

Answer 32

………….

Question 33

SRMC=

Answer 33

MPL

Question 34

What’s fixed in the short-run?

Answer 34

capital

Question 35

Isoquants are long-run or short-run?

Answer 35

LONG-RUN

Question 36

MRTS is the absolute value of what?

Answer 36

slope of the isoquant

Question 37

Points on the same isoquant have what in common?

Answer 37

-they produce the same output

Question 38

Set up the graph with axises

Answer 38

……….the letters

Question 39

What increases as the isoquants increase?

Answer 39

…..the production costs

Question 40

Why might a company stop in stage 1 of the marginal return graph?

Answer 40

-market is not big enough