Chapter 8 : Production in the Long Run

Question 1

Define the long run.

Answer 1

All inputs are variable. There are a number of ways to produce any given output.

Question 2

What is technical efficiency?

Answer 2

It occurs when a given number of inputs are combined in such a way as to maximize the level of output

To maximize profits, we need to choose from a # of technically efficient options. It is the lowest cost combination of labor and capital

Question 3

Is technical efficiency enough for profits to be maximized?

Answer 3

No. We need to pick from a number of technically efficient options.

Question 4

What is an isoquant?

Answer 4

It is a function what shows the relationship between the quantity of K and the quantity of L, for a fixed level of output

Question 5

What is the slope of the isoquant?

Answer 5

The marginal rate of technical substitution. It is the amount of Y we give up to obtain for more of Y.

Question 6

What does this table show?

Answer 6

It shows all of the technically efficient combinations to obtain a give level of output.

Question 7

What does an isoquant map show?

Answer 7

It shows the isoquant of each specific level of output.

The further away we are from the origin, the more output there is.

Question 8

True or False? Cost minimization is implied by profit maximization.

Answer 8

True.

Question 9

What are isocost graph?

Answer 9

It shows all of the combinations of inputs that cost the same amount of money.

Question 10

How to obtain the profit-maximizing option in regards to the levels of input and output?

Answer 10

We can overlap the isoquant and isocost graphs.

The cost-minimizing option will be the one where the point on the isoquant is tangent to the isocost line. THEY DO NOT INTERSECT!!!!!

Question 11

What is the equation for the cost-minimizing / profit-maximizing point on this graph?

Answer 11

MPL/MPK = PK/PL

or

MRS = slope of isocost line

Question 12

What is the principle of substitution?

Answer 12

The principle that methods of production change if relative prices of inputs change.
Relatively more of the cheaper input and relatively less of the more expensive input will be used

Question 13

What does the LRAC show?

Answer 13

The lowest possible cost of producing each level of output when all inputs vary.

Question 14

Why is there no distinction between AVC, AFC and ATC in the long run?

Answer 14

Because all costs are variable.

Question 15

The LRAC is a boundary between ________ and _________ cost levels with known technology and factor prices.

Answer 15

Attainable, unattainable

Question 16

True or False? In the long run, there is only 1 LRAC for any set of input prices.

Answer 16

True.

Question 17

What does the zone from 0 to Qm represent?

Answer 17

Decreasing costs
Increasing returns

Question 18

What is the Qm?

Answer 18

The first output possible at minimum average cost.

Question 19

What does Q to O represent?

Answer 19

Constant costs
Constant returns

Question 20

What does O to infinite represent?

Answer 20

Increasing costs
Decreasing returns

Question 21

What is a constant return?

Answer 21

A situation where the increase in output is proportional to a increase in inputs as production is increasing.

Question 22

What is an increasing return?

Answer 22

A situation where the increase in output is more than twice the increase in input as production increases.

Question 23

What is a decreasing return?

Answer 23

A situation where there is less output than the increase in input as production increases.

Question 24

Each SRATC is _______ to the LRAC at the point of the quantity of _______ factor is optimal.

Answer 24

Tangent.
Fixed.

Question 25

Why can’t any SRATC fall below the LRAC?

Answer 25

The LRAC is the lower envelope.
It is the lowest attainable cost for each period.