Firm Theory

Question 1

Define the production process

Answer 1

The production process (or technology) of the firm describes how firms transform inputs into outputs

Question 2

Define the production function

Answer 2

This summarizes the maximum quantity of output that can be produced with different combinations of inputs, given current knowledge about technology and organization

Question 3

The production function reports what type of processes

Answer 3

efficient production processes

Question 4

What are inputs like in the short run

Answer 4

at least one input is fixed (typically capital)

Question 5

What are inputs like in the long run

Answer 5

All factors of production can be changed, so all inputs are variable

Question 6

Define the marginal product of labor

Answer 6

This is the change in total output that results from employing an extra unit of labor, holding all other factors constant

Question 7

Define the average product of labor

Answer 7

This is the amount of output worked produced per worker on average

Question 8

The shape of the total product curve is determined by

Answer 8

The law of diminishing marginal returns - if a firm keeps increasing the usage of an input, holding all other inputs and technology constant, then the corresponding increases in output will eventually become smaller (diminish) –> speed depends on technology

Question 9

What 3 key properties do isoquants have

Answer 9

1. isoquants farther from the origin represent a higher level of output
2. isoquants do not cross
3. isoquants slope downwards