Chapter 9: Production and Cost in the Long Run

Question 1

isoquant

Answer 1

A 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; all isoquants lying above and to the right of a given isoquant indicates higher level of output

Question 3

marginal rate of technical substitution (MRTS)

Answer 3

The rate at which one input is substituted for another along an isoquant

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; useful tool for analyzing the cost of purchasing inputs

Question 5

expansion path

Answer 5

The curve or locus of points that shows the cost-minimizing input combination for each level of output with the input/price ratio held constant.

Question 6

long-run average cost (LAC)

Answer 6

Long-run total cost divided by output (LAC = LTC/Q).

Question 7

long-run marginal cost (LMC)

Answer 7

The change in long-run total cost per unit change in output (LMC = ΔLTC/ΔQ).

Question 8

economies of scale

Answer 8

Occurs when long-run average cost (LAC) falls as output increases.

Question 9

diseconomies of scale

Answer 9

Occurs when long-run average cost (LAC) rises as output increases.

Question 10

specialization and division of labor

Answer 10

Dividing production into separate tasks allows workers to specialize and become more productive, which lowers unit costs.

Question 11

constant costs

Answer 11

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

Question 12

minimum efficient scale (MES)

Answer 12

Lowest level of output needed to reach minimum long-run average cost.

Question 13

economies of scope

Answer 13

Exist when the joint cost of producing two or more goods is less than the sum of the separate costs of producing the goods.

Question 14

multiproduct total cost function: LTC (X,Y)

Answer 14

Gives the lowest total cost for a multiproduct firm to produce X units of one good and Y units of another good.

Question 15

joint products

Answer 15

When production of good X causes one or more other goods to be produced as by products at little or no additional cost.

Question 16

common or shared inputs

Answer 16

Inputs that contribute to the production of two or more goods or services

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 or experience economies

Answer 18

When cumulative output increases, causing workers to become more productive as they learn by doing and LAC shifts downward as a result.

Question 19

short-run expansion path

Answer 19

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