Production

Question 1

Where does profit maximisation happen?

Answer 1

MC = MR

Question 2

How do you maximize profits?

Answer 2

TR - TC

Question 3

What is a production function?

Answer 3

Tells us how much output a firm can produce for different levels of inputs
Y = F(K,L)

Question 4

What is the marginal product?

Answer 4

Describes how the level of output increases when the level of input increases, holding all other inputs fixed

Question 5

How do you derive the marginal product?

Answer 5

MPl/MPk - like the marginal utility from consumer theory

Question 6

What is returns to scale?

Answer 6

Describes how output increases when the levels of all inputs increase, simultaneously

Question 7

What happens when you double labor and capital?

Answer 7

Output doubles - constant returns to scale
Output less-than-doubles - decreasing returns to scale
Output more-than-doubles - increasing returns to scale

Question 8

What is an example of constant returns to scale?

Answer 8

Something that can be replicated separately, like retail franchising

Question 9

What is an example of increasing returns to scale?

Answer 9

Something that feeds on itself, like R&D

Question 10

What is an example of decreasing returns to scale?

Answer 10

Something that exhausts resources, like mining

Question 11

What is the total cost function?

Answer 11

Tells us the lowest possible expenditure that the firm can incur to product any given level of output

Question 12

What is the total cost function?

Answer 12

min rK + wL (+fixed costs)

Question 13

How do you calculate TFC?

Answer 13

Put q=0

Question 14

How do you calculate TVC?

Answer 14

Difference between TC and TFC

Question 15

How do you calculate AVC?

Answer 15

TVC/q

Question 16

How do you calculate ATC?

Answer 16

TC/q

Question 17

How do you calculate MC?

Answer 17

Cost of producing 1 more unit so derive TC/q

Question 18

Why does AFC always decrease?

Answer 18

Fixed costs get spread over more quantity

Question 19

Why does MC intersect at the minimum of AVC?

Answer 19

When the next unit costs more than the previous ones, it pulls the average up

Question 20

How do you solve for minimum cost in the long run?

Answer 20

Reach the lowest isocost line that touches the isoquant

Question 21

What should you know about isoquants?

Answer 21

They are decreasing because if you use more labour, you can use less capital to keep output constant

Question 22

What are isoquants?

Answer 22

These curves are often convex so the slope flattens because of decreasing marginal product

Question 23

What is the MRTS?

Answer 23

The slope of the isoquant

Question 24

What is the isocost line?

Answer 24

Tells us how much K,L cost
It is a straight line on the K,L graph

Question 25

What is the slope of the isocost line?

Answer 25

It is -w/r

Question 26

What is the solution to the cost minimisation problem?

Answer 26

It is the tangency point between the isoquant and the isocost curve

Question 27

What is optimality?

Answer 27

An additional dollar spent on labour yields the same output as an additional dollar spent on capital