Exam 4 chapters 6-7

Question 1

Theory of the firm

Answer 1

explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output

Question 2

Three steps of production decisions

Answer 2

1. Production technology
2. Cost constraints
3. Input choices

Question 3

Production technology

Answer 3

practical way of transforming inputs into outputs

Question 4

Cost constraints

Answer 4

take into account the prices of labor, capital(invested), and other inputs- cost of production

Question 5

Input choices

Answer 5

firm must choose how much of each input to using when producing the output

Question 6

factors of production

Answer 6

inputs into the production process

Question 7

production function

Answer 7

function showing the highest output that a firm can produce for every specified combination of inputs

Question 8

short run

Answer 8

period of time in which quantities of one or more production factors cannot be changed; at least one factor that cannot be varied

Question 9

fixed input

Answer 9

production factor that cannot be varied

Question 10

long run

Answer 10

amount of time needed to make all production inputs variable

Question 11

average product

Answer 11

output per unit of a particular input

Question 12

marginal product

Answer 12

additional output produced as an input is increase by one unit

Question 13

average product of labor=

Answer 13

output/labor input= q/L

Question 14

marginal product of labor=

Answer 14

change in output/ change in labor input= q/L

Question 15

average product of labor is given by

Answer 15

the slope of the line drawn from the orgin to the corresponding point on the total product curve

Question 16

marginal product of labor at a point is given by

Answer 16

the slope of the total product at that point

Question 17

law of diminishing marginal returns

Answer 17

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

Question 18

labor productivity

Answer 18

average product of labor for an entire industry or for the economy as a whole

Question 19

stock of capital

Answer 19

total amount of capital available for use in production

Question 20

technological change

Answer 20

development of new technologies allowing factors of production to be used more effectively

Question 21

isoquants

Answer 21

curve showing all possible combinations of inputs that yield the same output

Question 22

isoquant map

Answer 22

graph combining a number of isoquants, used to describe a production function

Question 23

Isoquants show the flexibility that firms have when making production
decisions:

Answer 23

They can usually obtain a particular output by substituting one input
for another. It is important for managers to understand the nature of this
flexibility.

Question 24

marginal rate of technical substitution (MRTS)

Answer 24

Amount by
which the quantity of one input can be reduced when one extra unit of another
input is used, so that output remains constant.

Question 25

fixed-proportions production function

Answer 25

Production function with L-shaped
isoquants, so that only one combination of labor and capital can be used to
produce each level of output

Question 26

The fixed-proportions production function describes situations in which

Answer 26

methods of production are limited

Question 27

returns to scale

Answer 27

Rate at which output increases as inputs are increased proportionately

Question 28

increasing returns to scale

Answer 28

Situation in which output more than doubles when all inputs are doubled

Question 29

constant returns to scale

Answer 29

Situation in which output doubles when all

inputs are doubled

Question 30

decreasing returns to scale

Answer 30

Situation in which output less than doubles

when all inputs are doubled

Question 31

accounting cost

Answer 31

Actual expenses plus depreciation charges for capital equipment

Question 32

economic cost

Answer 32

Cost to a firm of utilizing economic resources in production

Question 33

opportunity cost

Answer 33

Cost associated with opportunities forgone when a firm’s resources are not put to their best alternative use

Question 34

The concept of opportunity cost is particularly useful in situations where

Answer 34

alternatives that are forgone do not reflect monetary outlays

Question 35

economic cost=

Answer 35

opportunity cost

Question 36

sunk cost

Answer 36

Expenditure that has been made and cannot be recovered

Question 37

Because a sunk cost cannot be recovered,

Answer 37

it should not influence the firm’s decisions

Question 38

total cost

Answer 38

Total economic cost of production, consisting

of fixed and variable costs

Question 39

fixed cost

Answer 39

Cost that does not vary with the level of output and that

can be eliminated only by shutting down

Question 40

variable cost

Answer 40

Cost that varies as output varies

Question 41

amortization

Answer 41

Policy of treating a one-time expenditure as an annual cost

spread out over some number of years

Question 42

marginal cost

Answer 42

Increase in cost resulting from the production of one

extra unit of output

Question 43

average total cost

Answer 43

Firm’s total cost divided by its level of output

Question 44

average variable cost

Answer 44

Variable cost divided by the level of output

Question 45

average fixed cost

Answer 45

Fixed cost divided by the level of output

Question 46

user cost of capital

Answer 46

annual cost of owning and using a capital asset equal to economic depreciation plus foregone interest

Question 47

rental rate

Answer 47

cost per year of renting one unit of capital

Question 48

isocost line

Answer 48

graph showing all possible combinations of labor and capital that can be purchased for a given total cost

Question 49

expansion path

Answer 49

curve passing through points of tangency between a firm’s isocost lines and its isoquants

Question 50

long-run average cost curve (LAC)

Answer 50

Curve relating average cost of

production to output when all inputs, including capital, are variable

Question 51

short-run average cost curve (SAC)

Answer 51

Curve relating average cost of

production to output when level of capital is fixed

Question 52

long-run marginal cost curve (LMC)

Answer 52

Curve showing the change in longrun total cost as output is increased incrementally by 1 unit

Question 53

economies of scale

Answer 53

Situation in which output can be doubled for less than a doubling of cost

Question 54

diseconomies of scale

Answer 54

Situation in which a doubling of output requires more than a doubling of cost

Question 55

product transformation curve

Answer 55

Curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs

Question 56

economies of scope

Answer 56

Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product

Question 57

diseconomies of scope

Answer 57

Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product

Question 58

degree of economies of scope (SC)

Answer 58

Percentage of cost savings resulting when two or more products are produced jointly rather than Individually.