producer beviour

Question 1

what is the production function?

Answer 1

the production function shows the relationship between inputs and output. it reflects the technology regardless of input availability. it shows the maximum amount of the goods that can be produced using any combinations of inputs

Question 2

what is the cobb douglas production function?

Answer 2

Q=A x K^a x L^b where A is a multiplier, K is capital and L is labour

Question 3

what is the average product?

Answer 3

the total output divided by the total amount of an input used

Question 4

what is the marginal product?

Answer 4

marginal product is the additional output for additional unit of input. MP(labour) = change in Q/ change in L = dQ/dL

Question 5

what is the short run?

Answer 5

the short run refers to where on factor input is fixed. the formula is Q=f(K(fixed), L), we usually assume that capital is fixed in the short run

Question 6

what does the short run diminishing marginal returns mean if you want to double output?

Answer 6

you will need to more than double the input of labour to double output

Question 7

what is the slope of the production function at a given level of labour input?

Answer 7

it is the marginal product of labour

Question 8

what is the slope from the origin to the current level of production?

Answer 8

the average product of labour

Question 9

what is the long run?

Answer 9

the long run is when all the factors of production are variable

Question 10

what are isoquants?

Answer 10

isoquants are a graphical representation of a production function and show the combinations of K and L that can produce a given level of output

Question 11

what are the features of the isoquants?

Answer 11

there are different isoquants for each different Q
the isoquants do not cross
isoquants usually bend in toward the origin
output rises as we move out from the origin

Question 12

what is the marginal rate of technical substitution of LK

Answer 12

it describes the rate at which labour (the x axis input) maybe exchanged for capital (the y axis input) while holding the quantity produced constant

Question 13

what is the formula for the marginal rate of technical substitution?

Answer 13

MRTS(LK) = - change in capital/change in labour = MP(labour)/MP(capital)

Question 14

what occurs to labour and capital productivity when you increase labour input and decrease capital input?

Answer 14

labour becomes relatively less productive and capital becomes relatively more productive

Question 15

what is the MRTS when the inputs are perfect substitutes?

Answer 15

when the inputs are perfect substitutes, they can be exchanged in a constant ratio in a production process and thus the MRTS is constant

Question 16

if the inputs are perfect complements, what must the inputs be?

Answer 16

the inputs must be used in fixed proportion

Question 17

what are isocost lines?

Answer 17

Isocost lines show the combinations of inputs
that can be bought with a given budget.

Question 18

what is the formula for the isocost curve?

Answer 18

C=rK +wL where r is the cost of capital, w is the wage rate, K and L is capital and labour so this rearranged to K = C/r -w/r x L is the isocost curve

Question 19

what is the gradient of the isocost curve?

Answer 19

-w/r is the slope of the isocost line

Question 20

what is the cost minimising point?

Answer 20

the point at which the isoquant and isocost lines cross is the minimising cost point

Question 21

what is the formula for the cost minimising output?

Answer 21

w/r =MP(L) / MP(k)

Question 22

what occurs to the isocost and isoquant curves when the cost of labour falls?

Answer 22

we start off at the equillibrium between the isocost and isoquant curves. when the cost of labour falls, the isocost curve pivots around the capital axis stretching along the labour axis. this moves the isocost curve onto a higher isoquant curve meaning more labour and more capital is employed so there is greater output

Question 23

what occurs when there is a technological change?

Answer 23

following the development of superior productive technology, the firm can make more output from a given combination of inputs, this is often assumed to be a multiplicatiev improvement which is called the level of total factor productivity

Question 24

what is the expanision path?

Answer 24

as firms produce more output they use more capital and labour, at each level of output they attempt to minimise costs. the line joining all the cost minimising combinations of K and L is called the expansion path