Chapter 6

Question 1

What are the three types of firms?

Answer 1

1. Private sector
2. Public sector
3. Non-profit

Question 2

What is the private sector?

Answer 2

Owned by individuals and seek to maximize profit (eg. Apple, post secondary schools)

Question 3

What is the public sector?

Answer 3

Owned by the government? (e.g. Public hospitals, public schools, etc)

Question 4

What are non-profits?

Answer 4

Not owned by government, but they pursue social objectives (Furry friends, homeless shelters, etc)

Question 5

What are the three types of ownership of for-profit firms?

Answer 5

1. Sole proprietorship
2. Partnership
3. Corporations

Question 6

What is unique by corporations owners?

Answer 6

Since they are shareholders, they own the firm but are not responsible for its debts. This allows corporations to take bigger risks

Question 7

What is profit?

Answer 7

The difference between revenue and cost

Question 8

Three inputs into production:

Answer 8

1. Capital
2. Labour
3. Material
   (we focus on Capital and Labour)

Question 9

Variability of inputs in the short vs long run

Answer 9

Short run: inputs such as buildings are fixed, and some such as labour are variable
Long run: everything is variable

Question 10

Which variables are fixed in the short run?

Answer 10

capital

Question 11

What is the marginal product of labour?

Answer 11

How much additional output is produced by adding an additional unit of labour?

Question 12

What is the average product of labour?

Answer 12

The average output from each unit of labour being used?

Question 13

What happens to average product of labour (APL) when marginal product of labour (MPL) is greater than APL?

Answer 13

If MPL > APL, APL is increasing meaning an additional unit of labour is more productive than average

Question 14

What happens to average product of labour (APL) when marginal product of labour (MPL) is less than APL?

Answer 14

If MPL < APL, then APL is decreasing, meaning an additional unit of labour is less productive than average

Question 15

When is marginal product of labour (MPL) 0?

Answer 15

MPL = 0 when output reaches its maximum level

Question 16

What are the properties of isoquants?

Answer 16

1. Correspond to higher levels as you move
2. Don’t cross
3. Slope downwards
4. Cannot be thick

Question 17

What is the difference between isoquants and indifference curves?

Answer 17

The number associated with isoquants has meaning

Question 18

What is the marginal rate of technical substitution (MRTS)?

Answer 18

The rate at which we can substitute one input for another

Question 19

What is the marginal product of capital (MPK)?

Answer 19

How much output increases if capital increased by a small amount

Question 20

What is diminishing marginal rate of technical substitution (MRTS)?

Answer 20

The more you substitute one input for another, the more of it you need in order to keep substituting

Question 21

What are constant returns to scale?

Answer 21

output increases proportionally with input

Question 22

What are increasing returns to scale?

Answer 22

output increases more than proportionally with input

Question 23

What are decreasing returns to scale?

Answer 23

output increases less than proportionally with input