Long Run Theory Of Production

Question 1

Define the following

• production function
• short-run
• long-run

Answer 1

• Production Function describes the relationship between the inputs into the production process and resulting output.
  q=f(L, K)
• Shortrun refers to a period of time there is at least one fixed factor of production.
• Longrun refers to a period if tone needed to have all inputs variable .

Question 2

Define the following

• isoquant

- isoquant map

Answer 2

Isoquant is a curve that shows all possible combinations of inputs that yield the same output

Isoquant map represents a number of isoquants that describe the production function

Question 3

Define the following

- marginal rate of technical substitution

Answer 3

MRTS is the rate at which one input can be substituted for another at a given level of output
MRTS= change in K / change of L or MPL / MPK

Question 4

Diminishing Marginal Product

Answer 4

In the short run, as the use of one input increases (with others fixed) there will be a point where by additions to output per unit of added input decreases
E.G crowding out

Question 5

Marginal Product of Labour and Diminishing MPl

Answer 5

MPl is the additional output produced as Labour is increased by an additional unit. MPl = change in q / change in L

Diminishing MPl is as we hire more workers beyond a certain point, the additional output produced by an additional worker falls

Question 6

Describe the isoquant line for perfect substitutes and perfect compliments

Answer 6

For perfect substitutes isoquant line is straight

For perfect compliments isoquant line is “L-shaped”

Question 7

What is the Isocost line ?

Answer 7

The isocost line is also the total cost line. It is worked out by the cost of worker per year (Pl) multiplied by the Labour (L) added by the cost of capital per year (Pk) multiplied by Capital (K).
PL x L + Pk + k

Note: Pk = economic depreciation + interest rate X value of capital

Question 8

How to find the least-cost method of production

Answer 8

Where the isoquant is tangent to the lowest point in the isocost curve

Question 9

What is the expansion path and how is this useful?

Answer 9

The expansion path is the curve that traces the minimum-cost combination of Labour and capital as output increases

The LRTC curve shows the minimum long-run cost of producing each level of output

Question 10

Describe the Long Run Average Total Cost curve and what does it tell us about different scales of production?

Answer 10

It is a “U-Shaped curve and us worked out by LRATC= LRTC /q

• It shows economies of scales at low levels of output as firms experience falling per unit costs as output expands
• Constant returns to scale at intermediate levels of output, firm experiences constant costs
• Diseconomies of scale beyond a certain point as costs per unit grows as output grows