Producer theory

Question 1

factors of production

Answer 1

labor force, capital, land, raw materials

Question 2

isoquants

Answer 2

set of input combinations that allow the firm to produce the same amount of output

Question 3

Opportunity cost

Answer 3

payoff associated w the next best alternative

Question 4

Non-sunk costs

Answer 4

costs that are incurred only if a particular decision is made and are thus avoided if the decision is not made

Question 5

sunk costs

Answer 5

costs that must be incurred no matter what decision is made. They cannot be avoided or they have already been incurred

Question 6

Marginal product of a production factor

Answer 6

the additional output produced when one more unit of that input is used, keeping all other inputs constant

Question 7

Marginal rate of technical substitution

Answer 7

the rate at which one input can be substituted for another in the production process, without changing the total output.

Question 8

Return to scale

Answer 8

how a firm’s output changes when it increases all inputs by the same proportion.

Question 9

Isoquant

Answer 9

• same product can be produced by using different combinations of inputs
• same firm may choose different input combinations in different production facilities

Question 10

Perfect substitutable production factors

Answer 10

robots & workers

Question 11

Perfect complements

Answer 11

operators & technologies

Question 12

Law of diminishing marginal returns

Answer 12

as the use of one input increases and the quantity of other inputs are held fixed, a point will be reached beyond which the marginal product of that input will decrease

Question 13

Marginal product of labor

Answer 13

the additional output produced when one more unit of labor is added, keeping all other inputs (like capital) constant.

Question 14

Marginal product of capital

Answer 14

additional output produced when one more unit of capital (e.g., a machine) is used, keeping labor constant

Question 15

Average product of labor

Answer 15

total output (Q) produced divided by the number of units of labor (L) used.

Question 16

The magical rate of technical substitution (analysis)

Answer 16

• MRTS decreases as L increases (on the same isoquant)
• isoquants are convex
• is a convex function

Question 17

Returns to scale (1): if proportionate increase in all input quantities result in proportionate increase in output

Answer 17

the production function exhibits constant returns to scale

Question 18

Returns to scale (1): if proportionate increase in all input quantities result in a greater-than- proportionate increase in output

Answer 18

production function exhibits increasing returns to scale

Question 19

Returns to scale (1): if proportionate increase in all input quantities result in less-than-proportionate increase in output

Answer 19

production function exhibits decreasing returns to scale

Question 20

Returns to scale ≠ marginal returns

Answer 20

> returns to scale pertains to the impact of an increase in all input quantities simultaneously
marginal returns pertains the impact of an increase in the quantity of a single input

Question 21

Objectives for D & S

Answer 21

• d: consumers maximise utility subject to budget constraints
• s: firms maximise profits subject to technology constraints

Question 22

Profit =

Answer 22

Revenue - cost
p * q - Cost (q)

Question 23

Cost =

Answer 23

opportunity cost as opposed to accounting cost

Question 24

Economic profits =

Answer 24

Revenue - Opportunity Cost

Question 25

An opportunity cost

Answer 25

depends on the decision being made, it varies across time and w market prices

Question 26

Cost concepts for decision-making

Answer 26

- non-sunk costs - sunk-costs - nature of cost depends on the decision at hand and the point in time you are at

Question 27

When evaluating a project

Answer 27

magnitude of the sunk cost is not relevant only the non-sunk costs should be considered

Question 28

To maximise profit, a firm has to minimise the cost

Answer 28

- cost minimisation - profit maximisation

Question 29

Cost minimisation

Answer 29

fix the output level, find the cost minimising input combination to produce it, cost function

Question 30

profit maximisation

Answer 30

find the profit maximising output level given the cost function