Chapter 7: Production

Question 1

Production

Answer 1

any activity that creates present or future utility

Question 2

Production Function

Answer 2

The relationship that describes how inputs such as capital and labour are transformed into output.

Question 3

Long Run

Answer 3

The shortest period of time required to alter the amount of every input.

Question 4

Short Run

Answer 4

That period during which one or more inputs cannot be varied.

Question 5

Variable Input

Answer 5

An input whose quantity can be altered in the short run.

Question 6

Fixed Input

Answer 6

Input whose quantity cannot be altered within a given time (except perhaps at prohibitive cost).

Question 7

Law of Diminishing Returns

Answer 7

If other inputs are fixed, the increase in output resulting from an increase in the variable input must eventually decline.

Question 8

Total Product Curve

Answer 8

A curve showing the amount of output as a function of the amount of variable input.

Question 9

Marginal Product

Answer 9

Change in total product resulting from a one-unit change in the variable input.

Question 10

Average Product

Answer 10

Total product divided by the number of units of the variable input used in the production process.

Question 11

Isoquant

Answer 11

The set of all variable input combinations that yield a given level of output.

Question 12

Marginal Rate of Technical Substitution (MRTS)

Answer 12

The rate at which one input can be exchanged for another without altering the total level of output.

Question 13

Increasing Returns to Scale

Answer 13

The property of a production process whereby a proportional increase in every input yields a more than proportional increase in output.

Question 14

Constant Returns to Scale

Answer 14

The property of a production process whereby a proportional increase in every input yields an equal proportional increase in output.

Question 15

Decreasing Returns to Scale

Answer 15

The property of a production process whereby a proportional increase in every input yields a less than proportional increase in output.

Question 16

Diminishing Returns

Answer 16

Decrease in marginal product of the variable input while the other input(s) remain constant.

Question 17

Returns to Scale

Answer 17

Measures what happens with output if all inputs are increase by x percent.

Question 18

Economies of Scale

Answer 18

In the long run, a firm can decrease its average cost per product by increasing its scale of production.

Question 19

Economies of Scope

Answer 19

Lowering of a firm’s average costs as a result of producing two or more products.

Question 20

Fixed Cost

Answer 20

Cost that does not vary with the level of output in the short run (the cost of all fixed factors of production).

Question 21

Variable Cost

Answer 21

Cost that varies with the level of output in the short run (the cost of all variable factors of production).

Question 22

Total Cost

Answer 22

All economic costs of production: the sum of variable and fixed cost.