Producer Theory Flashcards
Inputs
Things that firms use to produce stuff
2 Inputs: Labor and Capital
Outputs
Whatever the firm is making
Labor
Number of workers involved in production
Capital
All physical objets necessary for production
Production function
Describes how different mixes of inputs can be translated into outputs for the firm.
(A function that represents how a firm’s inputs translate into output)
Short Run
The time frame in which capital is a fixed input but labor is a variable input
Long Run
The time frame in which both capital and labor is a variable input
Which of the following best describes the inputs to a firm’s production in the short run?
Labor is variable; Capital is fixed. A firm can hire or fire workers as needed in the short run, so labor is a variable input in the short run. On the other hand, the firm cannot easily buy or sell off land, machinery, or buildings in the short run, so capital is a fixed input in the short run.
Which of the following best describes the inputs to a firm’s production in the long run?
Both labor and capital are variable. In the long run, a firm can still hire or fire workers as needed, just as it could in the short run. In the long, the firm can also now buy or sell off its capital (e.g. land, machinery, and buildings) as needed. So both labor and capital are variable inputs that can be changed in the long run.
Marginal Product of Labor
The change in output resulting from hiring one extra worker, holding other inputs constant
Diminishing Marginal Product of Labor
With each additional worker hired, total output increases by less than it did when the previous worker was hired.
The principle of diminishing marginal product of labor best explains which of the following scenarios?
The average number of shirts produced by each worker at a shirt manufacturing company decreases after the company hires additional workers. The principle of diminishing marginal product of labor states that the next worker increases production by a smaller amount than the previous worker did. If a firm, such as the shirt manufacturing company, is adding additional workers who each produce fewer shirts than previous workers did (consistent with diminishing marginal product of labor), the average number of shirts produced by each worker will decrease.
Submit
The table below shows the total product of a firm as the firm hires additional workers (holding other inputs constant). Which worker has the highest marginal product?
The tenth worker. The marginal product of a given worker is the amount by which the addition of that worker increased the firm’s total product. Adding the ninth worker raised production from 500 to 530, corresponding to a marginal product of 30 for that ninth worker. The tenth worker raised production from 530 to 570, for a marginal product of 40. In a similar fashion, we can compute marginal products for the eleventh and twelfth workers of 20 and 10, respectively. The tenth worker’s marginal product of 40 is the highest.
The table below shows the total number of shirts produced by a firm as the firm hires additional workers (holding other inputs constant). At what point does the firm begin to experience diminishing marginal product of labor?
After hiring the second worker. The marginal product of a given worker is the amount by which the addition of that worker increased the firm’s total product. Adding the first worker raised production from 0 to 2, an increase of 2. Adding the second worker raised production from 2 to 7, an increase of 5. Adding the third worker raised production from 7 to 11, an increase of 4. So this third worker added less to the total product (4) than did the second worker (5). And the fourth, fifth, and sixth workers continued to add less and less to the total product (3, 2, and 0, respectively). So the firm began experiencing diminishing marginal product of labor after hiring the second worker.
Production Function
A function that represents how a firm’s inputs translate into output
Fixed Cost
Any costs the firm must pay which don’t depend on the quantity of output produced.
Variable Cost
All costs a firm pays that are not fixed costs.
Total Cost
All of a firm’s costs from producing a set units of output. Mathematically, it equals the sum of the firm’s fixed and variable costs
Diminishing Marginal Product of Labor
With each additional worker hired, total output increases by less than it did when the previous worker was hired.
Marginal Cost
The cost of producing an additional unit of a good
Average Total Cost (or Average Cost)
The total cost divided by the number of units produced
Average Fixed Cost
Total fixed cost divided by the number of units produced
Average Variable Cost
The variable cost divided by the number of units produced
Which of the following statements is always true?
Total Fixed Cost = Total Cost – Total Variable Cost. Production costs can be broken down into two types of costs: fixed costs and variable costs. Total cost is the sum of the total fixed cost and the total variable cost. Mathematically, Total Fixed Costs + Total Variable Cost = Total Cost, and if we subtract Total Variable Cost from both sides, we get the answer: Total Fixed Cost = Total Cost – Total Variable Cost.
The marginal cost curve always intersects the average total cost curve at ____________.
The minimum value of average total cost correct
Below is a graph showing curves for marginal cost (MC), average variable cost (AVC), average fixed cost (AFC), and average total cost (ATC). Which cost curves do A, B, C, and D represent, in order from A to D?
MC, ATC, AVC, AFC correct
In the graph below, what is the total cost and what is the total fixed cost of producing 15 units of output?
Total cost = $75; Total fixed cost = $15. At a quantity of 15 units, the average total cost is $5. Total cost is the average cost multiplied by the number of units: $5 x 15 = $75. Similarly, the total variable cost is the average variable cost, which we can see from the graph is $4 at a quantity of 15 units, multiplied by the number of units: $4 x 15 = $60. This is the total variable cost, but the question asked for the total fixed cost. The total fixed cost is simply the difference between the total cost and the total variable cost: $75 - $60 = $15.
If a firm’s average total cost increases as the firm decreases its output, the firm’s marginal cost must be _____________.
Less than the average total cost. If removing one unit of output increases a firm’s average total cost, that one unit of output must have cost less to produce than the original average total cost before it was removed. Therefore, at that level of production the marginal cost must be less than the average total cost.
Which of the following best explains why the short-run average total cost curve is U-shaped?
Spreading fixed costs over more output, then decreasing returns. Average total cost (ATC) is made up of average fixed cost (AFC) and average variable cost (AVC). AFC is always decreasing as production rises, since the initial fixed cost can be spread over more output. At lower levels of production, this effect is relatively large since adding one more unit when a firm is only producing 5 units will lower average fixed costs more than doing so when a firm is producing 500 units. This relatively large effect at low levels of production explains why average total cost curves start out downward-sloping. As production levels rise, the effect of spreading fixed costs over more output is counteracted, and eventually overtaken, by increasing marginal costs. Decreasing returns to production inputs means that the marginal cost of producing the next unit will rise as more units are produced. Eventually, this will result in the average total cost curve sloping upward as production levels increase.
The table below shows the costs of production for a firm.
According to the table, what is the average total cost of producing 4 units of output?
According to the table in 8a, what is the average fixed cost of producing 2 units of output?
8a:
25. The average total cost is the total cost divided by the number of units produced, which in this case is 4. The total cost is the initial fixed cost (20) plus the cost of producing each of the 4 units of output, or the marginal cost of each of these units. 20 + 30 + 20 + 10 + 20 = 100. A total cost of 100 divided by 4 units gives an average total cost of 25.
8b:
10. The average fixed cost is the total fixed cost (20) divided by the number of units produced, which in this case is 2. 20 divided by 2 gives an average fixed cost of 10.
A firm is producing 400 units of output at a total cost of $800. The average variable cost for the firm is $0.50 per unit. What is the firm’s average fixed cost?
$1.50. The average total cost (ATC) for this firm is $800 divided by 400 units, or $2.00 per unit. Since ATC is simply average variable cost (AVC) plus average fixed cost (AFC), and AVC is $0.50, AFC must be the remaining $2.00 - $0.50, or $1.50.
In the short run, which of the following types of cost must continuously decrease as output increases?
Average fixed cost. Since average fixed cost (AFC) is simply initial fixed cost (which doesn’t change as output increases) divided by quantity, as this quantity of output increases, AFC must decrease.
If the average variable cost of producing 10 units of a good is $20, and the average variable cost of producing 11 units of that good is $22, what is the marginal cost of increasing output from 10 to 11 units?
$42. The total cost of producing 10 units is 10 times the average cost of $20, or $200. The total cost of producing 11 units is 11 times the average cost of $22, or $242. The increase in the total cost from producing 10 to 11 units is $242 - $200, or $42, which is the marginal cost of producing that 11th unit.
