Production and Costs

Question 1

Producer Behavior Assumptions 7

Answer 1

1) Just one good, already determined.
2) Goal: Minimize production cost for a given level of output.
3) Two inputs: Capital (K) and Labor (L).
-Capital includes all buildings, machinery, tools, equipment, and raw materials
-Labor includes all human resources
* In the short run, capital is fixed but the amount of labor is easily adjusted.
4) Diminishing Marginal Returns (DMR) exist in the short run.
- e.g., When K is held constant, the additional output produced by one more worker
gets ever smaller with each additional worker.
- A mix of inputs is more productive than using either K or L alone.
5) More inputs leads to more output.
- When more units of K and more units of L are employed, total output goes up.
6) Fixed prices. Firms can buy any quantity of K and L at fixed prices.
7) No budget constraint -> more in focus to long run bc of capital market functions

Question 2

Production Function

Answer 2

Describes how a firm integrates factors of production to produce output (Q)
->tells you what output comes from a mix of combing capital and labor

Question 3

Marginal Product

Answer 3

Added output from an additional unit of input -> generally diminishes over higher quantities
MPL = DeltaQ / Delta L
MPL is the partial derivative of the production with respect to labor

Question 4

Returns to scale

Answer 4

A change in the amount of output in response to a proportional
increase in all of the inputs
IF INPUTS DOUBLE
1) Constant Returns to Scale -> outputs also double, the exponents will sum to 1
2) Increasing Returns to Scale -> Output more than doubles, the exponents sum to more than 1
3) Decreasing Returns to Scale -> Output less than doubles

Question 5

Short Run

Answer 5

-At least one factor of production is fixed (usually capital)
-The firm is stuck with the capital it has for a period of time
-> Results in Diminishing Marginal Returns

Question 6

Long Run

Answer 6

-All factors of production are variable; all inputs can be adjusted
-No DMR
-Challenge: Employ the optimal combo of capital (K) and labor (L)
to minimize cost for a certain level of output

Question 7

Marginal Costs

Answer 7

MC =DeltaVC/DeltaQ

Question 8

Isoquants

Answer 8

-Curve that maps possible combinations of K and L that
can produce a given output
-Higher isoquant means higher output level
-Convex to origin

Question 9

Marginal Rate of Technical Substitution (MRTS)

Answer 9

-MRTSLK is the amount of K no longer needed if the firm uses one
more unit of L to produce the same quantity of output Q
-Negative slope of the isoquant
-> MRTSSLK = MPL / MPK

Question 10

Isocost Lines

Answer 10

Line that shows the input combos that yield the same cost
-slope shows how much more of one input Labor L could be hired without increasing overall cost if less capital K was used or vice versa

Question 11

Cost-Minimization

Answer 11

Firm chooses L & K combo to minimize total cost for a
given output level
-Identical tangency condition as production maximization, but instead of a cost constraint there is now an output constraint
*the firm chooses the combo of L and K where its isoquant is
TANGENT to its isocost line\
->-MPL / MPK = -PL / PK

Question 12

Cost Minimizing where MP / P is equal across all inputs

Answer 12

-Marginal Product per dollar spent on each input is equal
MPL/PL = MPK / PK

Question 13

Economies of Scope

Answer 13

“Economies of Scope” exist when producing several goods together is less expensive than producing each of those good separately
Scope > 0 joint production cheaper
Score < 0 Joint production more expensive