Chapter 5

Question 1

Production function

Answer 1

Defines the maximum amount of output that can be produced with a given set of inputs. Q = F(K,L)

K = Units of capital
L = Units of labor

Question 2

Fixed factors of production

Answer 2

The inputs a manager cannot adjust in the short run

Question 3

Variable factors of production

Answer 3

The inputs a manager can adjust to alter production

Question 4

Short run production function

Answer 4

Q = f(L) = F(K*, L)

Question 5

Total product (TP)

Answer 5

The maximum level of output that can be produced with a given amount of inputs

Question 6

Average Product (AP)

Answer 6

A measure of the output produced per unit of input. APL = Q / L

Question 7

Marginal product (MP)

Answer 7

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

Question 8

Increasing marginal returns

Answer 8

Range of input usage over which marginal product increases

Question 9

Decreasing marginal returns

Answer 9

Range of input usage over which marginal product declines

Question 10

Negative marginal returns

Answer 10

Range of input usage over which marginal product is negative

Question 11

Average Product of Capital

Answer 11

APK = Q / K

Question 12

Marginal product of capital

Answer 12

MPK = Chg Q / Chg K

Question 13

Marginal product of labor

Answer 13

MPL = Chg Q / Chg L

Question 14

The manager’s role in the production process

Answer 14

Ensure that the firm operates on the production function and to ensure that the firm uses the correct level of inputs

Question 15

Value marginal product

Answer 15

The value of the output produced by the last unit of an input.

Question 16

Value marginal product of labor

Answer 16

VMPL = P x MPL

Question 17

Law of diminishing marginal returns

Answer 17

States that the marginal product of an additional unit of an input will at some point be lower than the marginal product of the previous unit.

Question 18

Linear production function

Answer 18

A production function that assumes a perfect linear relationship between all inputs and total output.

Question 19

Leontief production function

Answer 19

A production function that assumes that inputs are used in fixed proportions.

Question 20

Isoquants

Answer 20

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

Question 21

Marginal rate of technical substitution

Answer 21

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

Question 22

Law of diminishing marginal rate of technical substitution

Answer 22

A property of a production function stating that as less of one input is used, increasing amounts of another input must be employed to produce the same level of output

Question 23

Isocost line

Answer 23

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

Question 24

Changes in isocosts

Answer 24

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

Question 25

Cost minimization

Answer 25

Producing output at the lower possible cost

Question 26

Total cost

Answer 26

Sum of fixed and variable costs

Question 27

Fixed costs

Answer 27

Costs that do not change with changes in output; include the costs of fixed inputs used in production.

Question 28

Variable costs

Answer 28

costs that change with changes in output; include the costs of inputs that vary with output.

Question 29

Short-run cost function

Answer 29

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

Question 30

Average fixed cost (AFC)

Answer 30

Fixed costs divided by the number of units of output

Question 31

Average variable cost (AVC)

Answer 31

Variable costs divided by the number of units of output

Question 32

Average total cost (ATC)

Answer 32

Total cost divided by the number of units of output

Question 33

Marginal (incremental) cost (MC)

Answer 33

The change in total costs arising from a change in the managerial control variable Q.

Question 34

Irrelevance of Sunk Costs

Answer 34

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

Question 35

Sunk cost

Answer 35

A cost that is forever lost after it has been paid out.

Question 36

Cubic cost function

Answer 36

Costs are a cubic function of output; Provides a reasonable approximation to virtually any cost function.

Question 37

Long-run average cost curve

Answer 37

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

Question 38

Economies of scale

Answer 38

Exist whenever long-run average costs decline as output increases.

Question 39

Diseconomies of scale

Answer 39

Exist whenever long-run average costs increase as output increases.

Question 40

Constant returns to scale

Answer 40

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

Question 41

Multiproduct cost function

Answer 41

A function that defines the cost of producing given levels of two or more types of outputs assuming all inputs are used effectively.

Question 42

Economies of scope

Answer 42

Exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms.

Question 43

Cost complementarities

Answer 43

Exist when the marginal cost of producing one output is reduced when the output of another product is increased.