Chapter 8 - Producers in the Long Run

Question 1

In the short run, at least one factor is _

Answer 1

Fixed

Question 2

In the long run, all inputs are _

Answer 2

Variable

No fixed factors

Question 3

What is technical efficiency?

Answer 3

When given number of inputs are combined to maximize level of output

Question 4

Which option does the firm choose to maximize profit?

Answer 4

Lowest cost of labour and capital

Question 5

What is cost minimization?

Answer 5

Maximizing profits by choosing a level of output at the lowest possible cost

Question 6

What is the MP equation with K and L?

Answer 6

MPk/Pk = MPl/Pl
MPk/MPl = Pk/Pl

Question 7

When MPk/Pk=4 < MPl/Pl=10,
The last dollar spent on K adds _ units to output
The last dollar spent on L adds _ units to output

Answer 7

4, 10

Question 8

Regarding the previous example, what should the firm do to reduce cost?

Answer 8

Use more L and less K

Question 9

What is the principle of substitution?

Answer 9

Firms adjust the quantities of factors in response to changing relative factor prices

Question 10

What is an example of the principle of substitution?

Answer 10

Using ATM instead of labour

Question 11

The LRAC curve indicates the (max/min) achievable cost for each level of ouput

Answer 11

Minimum

Question 12

What does the LRAC curve separate?

Answer 12

Unattainable and attainable cost levels

Question 13

The LRAC is usually -shaped (or ‘ shape’)

Answer 13

U, saucer

Question 14

There are no (variable/fixed) factors in LR

Answer 14

Fixed

Question 15

When LRAC is falling, the firm is said to have _ _ _

Answer 15

Economies of scale

Question 16

Where is economies of scale found on the curve?

Answer 16

Decreasing costs, increasing returns

Question 17

What causes economies of scale?

Answer 17

Expansion in the scale of operations where more of all inputs are being used

Question 18

Where is the minimum efficient scale found on the curve?

Answer 18

At the beginning of constant costs, constant returns

At the min of LRAC

Question 19

Where is decreasing returns found on the curve?

Answer 19

Over the range of output greater than Qm

Question 20

Decreasing returns imply that the firm suffers some _ _ _

Answer 20

Diseconomies of scale

Question 21

Falling LRAC

Answer 21

Increasing returns to scale

Question 22

Constant LRAC

Answer 22

Constant returns to scale

Question 23

Rising LRAC

Answer 23

Decreasing returns to scale

Question 24

Increasing returns to scale occur when

Answer 24

% d output > % d inputs

Question 25

Decreasing returns to scale occur when

Answer 25

% d output < % d inputs

Question 26

Constant returns to scale occur when

Answer 26

% d output = % d inputs

Question 27

What is the difference between an LRAC and SRATC curve?

Answer 27

LRAC: all factors are variable
SRATC: one or more factors are fixed

Question 28

Can an SRATC curve fall below the LRAC curve?

Answer 28

No

Question 29

In the LR, firms are producing on the _ curve

Answer 29

LRAC

Question 30

Tech improvement shifts the LRAC curve (up/down)

Answer 30

Down

Question 31

A rise in factor prices shifts the LRAC curve (up/down)

Answer 31

Up

Question 32

A fall in factor prices shift the LRAC curve (up/down)

Answer 32

Down

Question 33

How do economists measure the extent of technological change?

Answer 33

Productivity

Question 34

What are two widely used measures of productivity?

Answer 34

Output/work

Output/hr of work

Question 35

Technological change is (exo/endo) to the economic system

Answer 35

Endogenous

Question 36

What are the three aspects of technological change?

Answer 36

New techniques, improved inputs, new products

Question 37

What is substituting away?

Answer 37

Changing production techniques within limits of existing technology

Question 38

What is innovating away?

Answer 38

Developing new production techniques

Question 39

Give an example of sub and inn away

Answer 39

Increase in price of coal
Sub: switch to other fuels
Inn: design tech that needs less fuel