Lecture 4: Costs and Competitive Firms

Question 1

What is an isoquant?

Answer 1

A curve along which quantity of output (cardinal) remains the same whilst one or more inputs is varied

Question 2

What is the marginal rate of technical substitution?

Answer 2

How much of one input (e.g. capital K) is required to replace another input (e.g. labour L) whilst keeping output quantity Q constant

Question 3

Formula for MRTS (slope of isoquant)

Answer 3

-Change in K/change in L | change in Q=0

Question 4

What does the convexity of isoquants imply?

Answer 4

Diminishing marginal rate of technical substitution

This is a LAW

Question 5

What is the MRTS equal to?

Answer 5

MPL/MPK

Question 6

How is the MPL derived?

Answer 6

Change in quantity/change in labour

Question 7

How is the MPK derived?

Answer 7

Change in quantity/change in capital

Question 8

How much does the quantity of output change when moving along an isoquant?

Answer 8

0

Question 9

What is homotheticity?

Answer 9

If the MRTS is constant on all rays out of the origin then f is homothetic

Homothetic functions are parallel

Question 10

If f is homogenous then f is also…

Answer 10

homothetic

but not vice versa

Question 11

If s = 1 then we will see..?

Answer 11

Constant returns to scale

Question 12

If s > 1 then we see..?

Answer 12

Increasing returns to scale

Question 13

If s < 1 then we will see..?

Answer 13

Decreasing returns to scale

Question 14

What are isocost lines?

Answer 14

Lines of equal cost (combinations of wL and rK the same)