Chapter 9: Concepts/ Theory

Question 1

Isoquant

Answer 1

curve showing all possible combinations of inputs physically capable of producing a given fixed level of output

Question 2

Isoquant map

Answer 2

a graph showing a group of isoquants

Question 3

Marginal rate of technical substitution (MRTS)

Answer 3

rate at which input is substituted for anything for another along an isoquant
change in K/ change in L= MPl/MPk

Question 4

Isocost curve

Answer 4

line that shows the various combinations of inputs that may be purchased for a given level of expenditure at given input prices
C= wL+rK
K= c (held constant)/r - (w/r)L

Question 5

The MP approach to cost minimization

Answer 5

MRTS= MPl/MPk= w/r
MPl/w=MPk/r

Question 6

What equation to use for the case that 2 variables are given and the firm wishes to maximize output for a given cost

Answer 6

MRTS= w/r

Question 7

Expansion path

Answer 7

curve or line of points that shows the cost minimizing input combinations for each level of output with the input/ price ratio held constant

Question 8

Long run average cost (LAC)

Answer 8

LR total cost (LTC) divided by output
LAC=LTC/Q

Question 9

Long run marginal cost (LMC)

Answer 9

change in LTC/ change in output (Q)

Question 10

Economies of scale

Answer 10

occurs when LAC falls as output increases

Question 11

Diseconomies of scale

Answer 11

occurs when LAC rises as output decreases

Question 12

Constant costs

Answer 12

neither economies of scale nor diseconomies of scale occur, thus LAC is flat and equal to LMC at all output levels

Question 13

Minimum efficient scale (MES)

Answer 13

lowest possible level of output needed to reach minimum LAC

Question 14

Economies of scope

Answer 14

occurs when the joint cost of producing two+ goods in less than the sum of the separate costs of producing the goods

Question 15

Multiproduct total cost function
LTC(X,Y)

Answer 15

gives the lowest TC for a multiproduct firm to produce X units of one good and Y units of another good

Question 16

When does economies of scope occur?

Answer 16

joint products
combination or shared inputs

Question 17

Purchasing economies of scale

Answer 17

large buyers of inputs receive lower input prices through quantity discounts, causing LAC to shift downward at the point of discount

Question 18

Learning/ experience economies

Answer 18

when cumulative output increases causing workers to become more productive as they learn, LAC shifts downward as a result

Question 19

SR expansion path

Answer 19

horizontal line showing the cost minimizing input combinations for various output levels when capital is fixed in the short run