Production and Costs

Question 1

Firm

Answer 1

An organisation that converts input ms to outputs

Question 2

Inputs

Answer 2

Capital
Labour
Materials

Question 3

Outputs

Answer 3

Goods

Services

Question 4

What is a necessary but not sufficient condition for profit maximisation

Answer 4

Efficient production

Question 5

What does the production function show?

Answer 5

The maximum amount of output that can be produced from the inputs

Question 6

Short run

Answer 6

Where capital is fixed

Question 7

Marginal product of labour

Answer 7

The additional output produced by an extra unit of labour

MPL= pdq/pdL

Question 8

Average product of labour

Answer 8

The ratio of output to the amount of labour employed

APL= q/L

Question 9

Isoquant

Answer 9

Shows the combinations of inputs that will produce a specific level of output.

Question 10

Isoquant properties

Answer 10

1. Isoquants further from the origin have a greater level of output
2. Isoquants don’t cross
3. Isoquants slope downwards
4. Isoquants must be thin

Isoquants have cardinal properties

Question 11

What is the slope of an isoquant called?

Answer 11

The marginal rate of technical substitution (MRTS)

Question 12

What is the MRTS equal to?

Answer 12

-MPL/MPK

Question 13

Constant returns to scale

Answer 13

When a % increase in inputs is followed by the same % increase in outputs. Occurs in all linear functions

Question 14

Increasing returns to scale

Answer 14

When a % increase in inputs is followed by a larger % increase in outputs

Question 15

How do we measure the costs of capital?

Answer 15

Rent or if there is no rental market then the opportunity cost of using that capital

Question 16

Sunk costs

Answer 16

These are past expenditures that can’t be recovered, these should never be relevant in production decisions

Question 17

Fixed costs

Answer 17

Costs that don’t vary with the level of output. Costs that are fixed in the short run can be variable in the long run

Question 18

Marginal costs

Answer 18

The change in costs if the firm produces an additional unit of output.

MC= dc(q)/dq = dvc(q)/dq

MC= w/MPL

Question 19

Average fixed costs

Answer 19

Fixed costs divided by output

AFC= FC/q

Question 20

Average variable costs

Answer 20

Variable costs divided by output

AVC=VC/q

AVC= w/APL

Question 21

Average total costs

Answer 21

Total costs divided by output

AC= C/q

Question 22

Long run

Answer 22

Where are all factors are variable so there are no fixed costs

Question 23

Isocost

Answer 23

Summarised all combinations of inputs that require the same total expenditure

Question 24

Isocost equation

Answer 24

K= -w/r x L + c/r

Question 25

How are budget constraints different to isocost lines?

Answer 25

Consumers have one budget constraint, fiend can have many isocost lines

Question 26

Properties of isocost lines

Answer 26

• the firms cost level c and in our prices determine where the isocost line hits the axes
• isocosts farther from the origin have higher costs
• the slope of each isocost is given by -w/r

Question 27

At which point is production maximised?

Answer 27

When MRTS= -w/r

MPL/w= MPK/r

Question 28

If a firm’s isoquants exhibit a diminishing marginal rate of technical substitution then
A) the more labour the firm has, the easier it is to replace capital with labour
B) the marginal product of capital will increase as we increase capital inputs
C) the firm can’t have a linear production function
D) the firms production function must be subject to decreasing returns to scale

Answer 28

C) the firm can’t have a linear production function