Managerial Econ 2

Question 1

Production and Cost Initial Questions

Answer 1

1. how can you tell when a combination of labor, machines, tools and other inputs are ok?
2. when should we expand or stop?
3. are there laws on how various combinations of inputs turn into commodities or services?

Question 2

Production Function

Answer 2

A descriptive statement that relates to Inputs and Outputs - show the maximum output attainable with given amounts of various inputs - fixed and variable
- depends on a) accessibility and b) cost combination

Question 3

Inputs of Production

Answer 3

1. Fixed inputs - do not change within the levels of output - e.g. machines, tools, buildings, etc.
2. Variable inputs - employment or usage vary with the levels of output - e.g. labor, electricity, etc.

Question 4

Law of Diminishing Returns

Answer 4

Business decisions are made on marginal characteristic

• As the level of variable inputs increases, the output increases for a while, then starts to decrease due to over-capacity of usage of the fixed inputs
  e. g. the use of fertilizer improves crop production; but at some point, adding more and more fertilizer improves the yield less per unit of fertilizer, and excessive quantities can even reduce the yield.

Question 5

Returns to Scale

Answer 5

It explains the behavior of rate of increase in the output/production to the subsequent increase in the inputs. Depending on the level of production, level of machinery, etc., can be:

1. Decreasing
2. Constant
3. Increasing

Question 6

Returns to Factor

Answer 6

The return attributable to a particular common factor. Can be:

1. Decreasing
2. Constant
3. Increasing

Question 7

Substitutability

Answer 7

• Flexibility in production is essentially an issue of substitution of one input - how easy is it to substitute?
• Some productions are more capital-intensive, some more labor-based.

Question 8

Rate of Factor Substitution

Answer 8

• rate you can substitute without impacting utility

- elasticity of substitution is important and also time frame for such flexibilities

Question 9

Relevant Factors of Production Function

Answer 9

1. Total Product
2. Average Product - total output per unit of variable output
3. Marginal Product - per unit contribution by the last level of input (the question: should I use one more unit?)

Question 10

Stages of Production

Answer 10

Stage 1: Marginal product is above the average product - it may be rising or falling. The beginning - production is slow - it must expand to utilize the input factor effectively
Stage 2: Marginal product falls below the average product - the average product has reached its max and is falling. Production spikes so increasing but at a slower rate - decision to employ a particular level of the factor is market driven
Stage 3: Marginal product is negative or total product has reached its maximum and is declining - production should not extend to this stage

Question 11

Input Combinations

Answer 11

• management deciding most levels of fixed and variable input to create desired level of output
• how efficient can be and how can prices can be managed given these levels

Question 12

Isoquant (equal quantity) Curve

Answer 12

combinations of inputs, fixed and variable, capable of producing a particular level of output
I = ab + lk (Investment = labor cost + capital cost) = curve

Question 13

Isocost (equal cost) Curve

Answer 13

combinations of inputs, fixed and variable, producing a particular level of output that cost the same
k = a - bl = linear

Question 14

Operational Feasibility

Answer 14

Where the isoquant curve and the isocost curve cross

Question 15

Factor Substitution

Answer 15

• for a variety of reasons (variation in cost, availability, etc.), may want to replace one factor of production with another
  e. g. labor is too expensive and therefore, use automation to cut labor cost

Question 16

Marginal Rate of Technical Substitution (MRTS)

Answer 16

the amount of one input required to replace another input without impacting the level of output
e.g. need two robots to replace one worker…MRTS = -1L/2R

Question 17

Marginal Revenue Product (MRP)

Answer 17

the revenue generated by using an additional input

Question 18

Marginal Resource Cost (MRC)

Answer 18

additional cost of employing one more unit of input

Question 19

Optimum Use of Singe Input Factor

Answer 19

MRC = MRP

Question 20

Input Demand Function

Answer 20

what determines the demand for a factor? the input factor’s MRP

Question 21

Input Supply Function

Answer 21

supply of a factor is not easily determined - price is the best determinant

Question 22

Optimum Combination of Multiple Inputs

Answer 22

employ factors to the point that the ratio of their MRP to their prices is the same
For two factors L and K
MRPl/w = MRPk/r
w = price of L
r = price of k

Question 23

Expansion Path

Answer 23

production expand along a path consistent with the optimum combination rule

Question 24

Elasticity of Factor Substitution

Answer 24

• some factors of production can be changed easily (e.g. unskilled workers) and some cannot (e.g. technical workers)
• relative sensitivity of output to variations in an input is the elasticity of output to that input

Question 25

Labor Elasticity

Answer 25

- Formula:
%change TP/%change L
- E > 1 - increasing
- E = 1 - constant
- E < 1 - decreasing

Question 26

Production: An Example

Answer 26

STUDY

Question 27

Cost of Production

Answer 27

amount of money (out-of-pocket expenses) and other resources you need to pay for to produce different levels of output
Accounting (money changing hands) vs. Economic (includes objects not able to value) Costs

Question 28

Relevant Costs

Answer 28

1. Opportunity Cost - what else could you have been doing?
2. Explicit Costs
3. Implicit Costs - not measurable (include sunk cost like R&D)

Question 29

Time and Production

Answer 29

“time” in business refers to the periods needed to change one or more factors of production

Question 30

Short-Run Cost

Answer 30

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