Chapter 6

Question 1

How businesses are organized affects who makes decisions and the firms objective, such as whether it tries to maximize profit

Answer 1

Ownership and Management of Firms

Question 2

An organization that converts inputs, such as labor, materials, energy, and capital, into outputs, the goods and services that it sells

Answer 2

Firm

Question 3

Consists of firms owned by individual or other non governmental entities whose owners try to earn a profit

Answer 3

Private Sector

aka

For-Profit Private Sector

Question 4

This sector contributes the most to the GDP (gross domestic product - a measure of the country’s total output)

Answer 4

Private Sector

aka

For-Profit Private Sector

Question 5

Consists of firms and organizations that are owned by government or government agencies

Answer 5

Public Sector

Question 6

Consists of organizations that are neither government owned nor intended to earn a profit

Answer 6

Non Profit Sector

aka

Not-For-Profit Sector

Question 7

What are the three legal forms of organization for firms in the private sector?

Answer 7

1. Sole Proprietorship
2. General Partnership
3. Corporation

Question 8

Firms owned by a single individual

Answer 8

Sole Proprietorship

Question 9

Businesses jointly owned and controlled by two or more people operating under a partnership agreement

Answer 9

Partnerships

Question 10

Condition whereby the personal assets of the owners of the corporation cannot be taken to pay a corporations debts of it goes into bankruptcy

Answer 10

Limited Liability

Question 11

In this organization, the most shareholders can lose is the amount they paid for their stock

Answer 11

Limited Liability

Question 12

The purpose of this organization is to allow firms to raise funds and grow beyond what was possible when owners risked personal assets on any firm in which they invested

Answer 12

Limited Liability

Question 13

The difference between what it earns from selling a good and what it pays for labor, materials, and other inputs

Answer 13

Profit

Profit= R-C
R= price*quantity

Question 14

The current level of output cannot be produced with fewer inputs, given existing knowledge about technology and the organization of production

Answer 14

Efficient Production

Question 15

If given the quantity of inputs used, no more output could be produced using existing knowledge

Answer 15

Efficient Production

Question 16

A necessary condition for profit maximization but it alone is not a sufficient condition to ensure that a firms profit is maximized

Answer 16

Efficient Production

Question 17

Summarizes how a firm converts inputs into outputs using one of the available technologies

Answer 17

Production Function

Units of Output=
q=f(L,K)

Question 18

The relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organizations

Answer 18

Production Function

Question 19

Has constant returns to scaled if, when the firm doubles it’s input, it’s output also doubles

f(2K,2L)=2f(L,K)=2q

Answer 19

Production Process

Question 20

Long-lived inputs such as land, buildings (factories, stores), and equipment (machines, trucks)

Answer 20

Capital (K)

Question 21

Human services such as those provided by managers, skilled workers (architects, economists, engineers, plumbers), and less skilled workers (custodians, constructions laborers, assembly-line workers)

Answer 21

Labor (L)

Question 22

Raw goods (oil, water, wheat) and processed products (aluminum, plastic, paper, steel)

Answer 22

Materials (M)

Question 23

Shows only the maximum amount of output because it includes only efficient production processes

Answer 23

Production Function

Question 24

A period of time so brief that at least one factor of production cannot be varied practically

Answer 24

Short Run

Question 25

A factor of production that cannot be varied practically in the short run

Answer 25

Fixed Input

Question 26

A factor of production whose quantity can be changed readily by the firm during the relevant time period

Answer 26

Variable Input

Question 27

A lengthy enough period of time that all inputs can be varied

Answer 27

Long Run

Question 28

All factors of production are variable inputs in the

Answer 28

Long Run

Question 29

What has greater flexibility? The long run or the short run?

Answer 29

Long Run

Question 30

Only some inputs can be varied so the firm changes its output by adjusting its variable inputs

Answer 30

Short-Run Production q=f(L,K) K has bar over it because it has a fixed number of units of capital

Question 31

Output

Answer 31

Total Product

Question 32

The change in total output, /_\ q, resulting from using an extra unit of labor, /_\ L, holding other factors constant

Answer 32

Marginal Product of Labor (MP v L) MPvL = /_\q divided by /_\L

Question 33

Determines how much an extra worker will increase output

Answer 33

Marginal Production of Labor

Question 34

The ratio of output, q, to the number of workers, L, used to produce that output

Answer 34

Average Product of Labor (APvL) APvL = q/L

Question 35

To find out if output will rise in proportion to extra labor

Answer 35

Average Product Per Worker

Question 36

Explains how firms make decisions about production processes, types of inputs to use, and the volume of output to produce

Answer 36

Economic Theory

Question 37

If a firm keeps increasing an input, holding all other inputs and technology constant, the corresponding increase in output will become smaller eventually

Answer 37

The Law of Diminishing Marginal Returns aka Diminishing Marginal Product *total return can still rise

Question 38

As the amount of labor used grows large enough, the marginal product curve becomes

Answer 38

Nearly Flat

Question 39

Extra labor causes total output to fall

Answer 39

Diminishing Returns

Question 40

The firm has more flexibility in how it produces and how it changes its output level when all factors can be varied

Answer 40

Long-Run Production

Question 41

Firm can substitute one input for another while continuing to produce the same level of output Ex. Produce 400 planks of wood using 10 people with hand saws, 4 people with handheld power saws, or 2 people with bench power saws

Answer 41

Long-Run Production

Question 42

A curve that shows the efficient combinations of labor and capital that can produce a single level of output (quantity)

Answer 42

Isoquant q=f(L,K) where q has bar over it because output is held constant

Question 43

The further an isobutane is from the origin, the ______ the level of output

Answer 43

Greater The more input it uses, the more output it gets if it produces efficiently

Question 44

Do isoquants cross?

Answer 44

No If they cross then the firm is producing inefficiently

Question 45

Isoquants slope ____

Answer 45

Downward If it slopes upward that means it can produce same output with less input (inefficient)

Question 46

Slope of an isoquant

Answer 46

Marginal Rate of Technical Substitution (MRTS)

Question 47

What does an isoquant curve show?

Answer 47

How readily a firm can substitute one input for another

Question 48

Most isoquant slope (upward/downward), are (convex/concave), curve (towards/away) from origin and lie between _____ and _____

Answer 48

``` Downward Convex Away Perfect Substitutes (straight diagonal lines) Non Substitutes (right angles) ```

Question 49

The number of extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant

Answer 49

Marginal Rate of Technical Substitution (MRTS)

Question 50

The slope of an isoquant is (positive/negative)

Answer 50

Negative

Question 51

Firm can produce a given level of output by substituting more capital for less labor (or vice versa)

Answer 51

Marginal Rate of Technical Substitution (MRTS)

Question 52

Tells us how much a firm can increase one input and lower the other while still staying on the same isoquant

Answer 52

Marginal Rate of Technical Substitution (MRTS)

Question 53

The decline MRTS (in absolute value) along an isoquant as the firm increases labor

Answer 53

Diminishing Marginal Rates of Technical Substitution

Question 54

The more labor and less capital a firm has, the harder it is to replace remaining capital with labor and the flatter the isoquant becomes

Answer 54

Diminishing Marginal Rates of Technical Substitution

Question 55

When don't isoquants exhibit diminishing marginal rates of technical substitution?

Answer 55

When isoquants are straight lines aka Inputs are perfect substitutions

Question 56

When do you shift from one isoquant to another?

Answer 56

By increasing one input while holding the other input constant

Question 57

How the ratio of output to input varies with the size of the firm is an important factor in determining the size of a firm

Answer 57

Returns to Scale

Question 58

Property of a production function whereby when all inputs are increased by a certain percentage, output increases by that same percentage

Answer 58

Constant Returns to Scale (CRS)

Question 59

Property of a production function whereby output rises more than in proportion to an equal increase in all inputs

Answer 59

Increasing Returns to Scale (IRS)

Question 60

If doubling inputs more than doubled the output f(2L,2K) > 2f(L,K)=2q

Answer 60

Increasing Returns to Scale (IRS)

Question 61

Property of a production function whereby output increases less than in proportion to an equal percentage increase in all inputs f(2L,2K)

Answer 61

Decreasing Returns to Scale (DRS)

Question 62

Production function where the returns to scale are the same at all levels of output

Answer 62

Cobb-Douglas

Question 63

The amount of output that can be produced with a given amount of inputs varies across firms and over time

Answer 63

Productivity and Technical Change