Production

Question 1

Production Function

Answer 1

q=f(L,K)

Question 2

Returns to scale

Answer 2

the rate of change in the output relative to the level of input.
there can be increasing, constant and decreasing returns to scale.

Question 3

Increasing

Answer 3

Output increases more than proportion to an equal increase in inputs.

Question 4

Decreasing

Answer 4

Output is less than proportion to the level of input

Question 5

Constant

Answer 5

whereby the level of output is equivalent to the level of input.

Question 6

Average cost and Returns to scale

Answer 6

Average cost falls when firm exhibits increasing returns to scale, etc

Question 7

COBB DOUGLAS FUNCTION

Answer 7

Q(L,K) = A Lβ Kα

Question 8

Profit

Answer 8

profit = TR-TC

Question 9

TOTAL COST

Answer 9

=wL + rK (labour and capital, receiving wages and rent)

Question 10

how does a firm select between capital and labour?

Answer 10

wage rate and rental rate are determined by supply and demand, a firm employs labour until marginal revenue is equal to the wage rate/rental rate.

Question 11

competitive firm maximises profit

Answer 11

MPl/MPk = w/r

Question 12

ISOQUANT

Answer 12

indifference curves - indicates the various combinations of two factors of production which give the same level of output per unit of time. EQUAL LEVELS OF SATISFACTION

Question 13

ISOCOST

Answer 13

budget line - combination of production with in budget constraint - keeping total cost the same

Question 14

point on tangency

Answer 14

this is where cost are minimised - or profit maximisation imply the same level of output in PERFECT COMPETITION know as duality.

Question 15

fixed factor inputs

Answer 15

fixed factors that do not change as output is increased/decreased

Question 16

variable factor input

Answer 16

variable factors are those that do change with output, meaning they are employed when output increases/decreases

Question 17

the very short run

Answer 17

the only way to increase output in by using up the existing stock

Question 18

short run

Answer 18

increase output by using more variable factors - such as hiring workers, they do not use extra fixed factors (at least one factor of production is fixed)

Question 19

the long run

Answer 19

when the scale of operations have increased - means no factors of production is fixed and all are variable. meaning the firm can expand, or rent larger premsis

Question 20

the law of diminishing returns

Answer 20

whenever a firm tries to increase output by applying additional variable inputs to a fixed factor. the marginal returns generated from adding new variable factors will not be constant, it will rise at first, reaching an optimum point and then eventually diminish

Question 21

product curve

Answer 21

marginal returns curve increases and then decreases, the marginal curve cuts the average curve at its peak

Question 22

shape of the curves

Answer 22

marginal returns increase quickly as specialisation occurs, and efficiency increases. this allows labour to develop skill and become more productive. eventually starts to diminish as the effect of specialisation and new skills wear off.