Chapter 6 - Producer Behaviour

Question 1

What is ‘production’?

Answer 1

It is the process of transforming inputs into a good or service which consumers are willing to pay for.

Question 2

What is the difference between a final good and an intermediate good?

Answer 2

A final good is bought purely for consumption whereas an intermediate good is used to produce something else.

Question 3

What does the production function describe?

Answer 3

The amount of output a firm can generate from different combinations of inputs.

Question 4

What are the first 4 assumptions about the production function?

Answer 4

1. The firm only produces one good which has already been chosen
2. The firm will always aim to minimize production costs
3. There are only 2 inputs, capital + labour
4. In the SR capital is fixed whereas labour can be changed freely in both the SR and the LR

Question 5

What are the second 4 assumptions about the production function?

Answer 5

5. The more a firm inputs, the more it will output
6. Diminishing returns apply to both capital and labour
7. The firm can buy as much inputs as it wants
8. The firm does not have a BC due to banks and investors

Question 6

What is the SR defined as?

Answer 6

It is the period where the firm is unable to change its capital inputs.

Question 7

What is the marginal product?

Answer 7

It is the additional output created from an extra unit of input.

Question 8

What is the MP of labour and when is it important?

Answer 8

It is the change in overall quantity produced from a change in labour inputs.

Question 9

What is the equation for the MP of L?

Answer 9

MP of labour = the change in overall Q divided by the change in L.

Question 10

What is average product?

Answer 10

It is how much output is produced per unit of input and is found by dividing output by labour.

Question 11

Why might output be higher in the LR than the SR?

Answer 11

The flexibility firms have over both capital and labour will allow them to respond to changes in price and improve production methods to lessen the effects of diminishing marginal product.

Question 12

What is an isoquant?

Answer 12

It is similar to an indifference curve however instead of preferences it represents all the different combinations of inputs which will allow the firm to reach the desired output level.

Question 13

What is the MRTSlk?

Answer 13

It is the rate at which a firm can trade labour for capital while still holding output constant.

Question 14

How is the MRTSlk calculated?

Answer 14

It is the negative of the slope of the isoquant at any given point or - change in K/change in L = MPl/MPk

Question 15

What does a highly curved isoquant indicate?

Answer 15

It indicates that capital and labour are poor substitutes.

Question 16

What is an isocost line?

Answer 16

It illustrates the various costs at which the firm can produce its quantity.

Question 17

What is the equation of an isocost line?

Answer 17

C = RK +WL

Question 18

What does a steep isocost line indicate?

Answer 18

It indicates that Labour is relatively expensive in comparison to capital.

Question 19

What are returns to scale?

Answer 19

They are the change in overall output in response to a proportional increase/decrease of all inputs.

Question 20

What are constant returns to scale?

Answer 20

They are when output increases in proportion with the increase in inputs.

Question 21

What are increasing/decreasing returns to scale?

Answer 21

When output does not change proportionally with input.

Question 22

What factors affect returns to scale?

Answer 22

External influences, fixed costs, learning by doing as if a firm were just to increase the scale of its production then returns should naturally be constant.

Question 23

What is total factor productivity growth/technological change?

Answer 23

It is the common phenomenon where over time outputs will increase despite there being no change to the amount of inputs.

Question 24

What causes total factor productivity growth?

Answer 24

It is often due to technological advancement and can be calculated by imagining technology is a constant which multiplies the production function ie. Q = Af(K,L).

Question 25

What is the firm’s expansion path?

Answer 25

It is a curve which illustrates how the optimal combination of inputs will vary depending on the desired output.

Question 26

How do we map the firm’s expansion path?

Answer 26

By plotting the cost-minimizing bundles for different quantities and connecting them.

Question 27

What is the firm’s total cost curve?

Answer 27

It is very similar to an Engel curve and uses information from the expansion path to plot how just one of the variables in the cost-minimizing bundles will change with required output.