Exam 2

Question 1

Law of Diminishing Marginal Return

Answer 1

-Production function explicitly includes one fixed input and one variable input.
Q= Q(K[bar], L)

Question 2

Total output

Answer 2

Q = TP

Question 3

Average Product (AP)

Answer 3

Q/L = TP/L

Question 4

Marginal Product (MP)

Answer 4

Change in Quantity (Q) / Change in Labor (L) = change in Total output (TP) / Labor (L)

Question 5

Isoquant

Answer 5

Traces a given level of output with varying combinations of capital and labor (Foci of various combinations of K and L yielding a given level of output)

Question 6

Isocost

Answer 6

a given cost involving inputs of K and L that can be met via incurring a monetary outlay at the disposal of the firm.
Goal of the business firm is given the isocost, attain the maximum output or attain a given output minimize the cost.

Question 7

Definition of Marginal Rate of technical substitution

Answer 7

Rate at which substitution between K and L required such that the output level will remain unchanged. MRTS = Marginal Product of L / Marginal Product of K

Question 8

Isocost line

Answer 8

Monetary outlay (R) = Number of units of K * P per K + Number of units of L * P per L

Question 9

Derivation of Total Cost (TC)

Answer 9

TC = TFC + TVC

Question 10

Derivation of Average Fixed Cost (AFC)

Answer 10

AFC = TFC / Q

Question 11

Derivation of Average Variable Cost (AVC)

Answer 11

AVC = TVC / Q

Question 12

Derivation of Marginal Cost (MC)

Answer 12

MC = change in TC / change in Q

Question 13

Issues involved in Long run per unit cost functions

Answer 13

1) Firm wanting to expand productive capacity ( in view expanding demand)
2) Involves changing the scale of operation (horizontal expansion)
3) Existing tech embedded in machinery, infrastructure etc: continued to be incorporated in new machinery