Lecture 7 - Technology, Production, and Costs

Question 1

Technology

Answer 1

The processes a firm uses to turn inputs into outputs

Question 2

Technological Change

Answer 2

A change in the ability of a firm to produce a given level of output with a fixed quantity of inputs

Question 3

Short Run

Answer 3

A period of time during which at least one of the firm’s inputs is fixed

Question 4

What is one factor of production that tends to be fixed in the short run?

Answer 4

Capital

Question 5

Long run

Answer 5

A period of time during which none of the factors of production are fixed; all inputs free to vary

Question 6

Variable Costs

Answer 6

Costs that change as output changes

Question 7

Fixed Costs

Answer 7

The costs that remain constant as output changes

Question 8

True or False: In the long run, all costs are variable costs

Answer 8

True

Question 9

Total Cost expression in the short run

Answer 9

TC = Fixed Costs + Variable Costs

Question 10

Average Total Cost Expression

Answer 10

ATC = AFC + ATC

Question 11

Average Fixed Cost Expression

Answer 11

FC/Q

Question 12

Average Variable Cost Expression

Answer 12

VC/Q

Question 13

Explicit Cost

Answer 13

A cost that involves the direct payment of money

Question 14

Implicit Cost

Answer 14

A non-monetary opportunity cost

Question 15

Production Function

Answer 15

Captures the relationship between the inputs employed and the maximum output of the firm

Question 16

True or False: Total Cost is 0 when quantity is 0

Answer 16

False

Question 17

True or False: At low levels of production, ATC falls as output increases. At higher levels of production, ATC may rise as output increases.

Answer 17

True

Question 18

What is the shape of an ATC curve and why?

Answer 18

U-shaped because of the rising-then-falling nature of average total cost

Question 19

Marginal Product of Labor

Answer 19

the additional output a firm produces as a result of hiring one more worker

Question 20

Law of Diminishing Returns

Answer 20

At some point, adding more of a variable input to the same amount of a fixed input will cause the marginal product of the variable input to decline

Question 21

Marginal Cost

Answer 21

the change in a firm’s total cost from producing one more unit of a good or service

Question 22

What shape is the ATC curve?

Answer 22

U-shaped

Question 23

What shape is the AVC curve?

Answer 23

U-shaped

Question 24

Does Marginal cost intersect ATC and AVC. If so, where?

Answer 24

Yes; at their minimum point

Question 25

Long-run average cost

Answer 25

Shows the lowest cost at which a firm is able to produce a given output in the long run when no inputs are fixed;

Question 26

Economies of Scale

Answer 26

As output increases, long-run average total cost decreases

Question 27

Constant Returns To Scale

Answer 27

long-run average total cost remains unchanged as output increases

Question 28

Minimum Efficient Scale

Answer 28

The lowest level of output at which all economies of scale are exhausted

Question 29

Diseconomies of Scale

Answer 29

A firm’s long-run average total cost increases as output increases

Question 30

Why do economies of scale arise? (3)

Answer 30

1. Specialization
2. Bulk discount (in terms of input prices)
3. some products require large-scale production

Question 31

Why do diseconomies of scale arise? (3)

Answer 31

1. firm has to employ factors of production that are less well suited to production
2. coordination inefficiencies - at some point, managers may have difficulty coordinating huge operations
3. problems devising efficient compensation packages