The Production Function

Question 1

Constant Economics of Scale

Answer 1

When your LRAC is constant as output increases

Question 2

The Production Function

Answer 2

Inputs of your production into a function that tells you volume of output

Short-Run: some inputs fixed

Question 3

TPL

Answer 3

Total Product

Amount of product produced with the given amount of labour

Question 4

MPL

Answer 4

Marginal Product of Labour
How much product for most recent unit of labour

(Q2-Q1)/(L2-L1) or (TPL2-TPL1)/(L2-L1)

Slope of TP curve

Question 5

VMPL

Answer 5

Value Marginal Product of Labour

Convert MPL to dollars

VMPL = MPL * p

Question 6

APL

Answer 6

Average Product of Labour

TPL/L

How much produced relative current amount of labour

Question 7

Diminishing Returns

Answer 7

MPL decreasing
MPL2 < MPL1

Question 8

MC

Answer 8

Marginal Cost

How much did last increment in output cost?

(C2-C1)/(Q2-Q1) or (C2-C1)/(TP2-TP1)

As MPL increases, MC decreases
As MPL decreases, MC increases

Question 9

AVC

Answer 9

Average Variable Costs

AVC = VC/TPL

Minimum of AVC when AVC = MC

When AVC > MC: AVC decreasing

When AVC < MC: AVC increasing

Question 10

AFC

Answer 10

Average Fixed Cost

Constantly decreasing

FC/TPL

Question 11

ATC

Answer 11

Average Total Costs

Minimum MC = ATC

TC/TPL = AFC + AVC

When ATC > MC: AVC decreasing

When ATC < MC: AVC increasing

Question 12

LRAC

Answer 12

Long Run Average Cost

No fixed costs, so you want to take the minimum of ATCs for each variation of what is a fixed cost in the short run

Graph will be flatter than ATC curves

Question 13

Profit Maximum

Answer 13

VMPL = w = MC * p

where w is unit cost of labour

or where MC = MR

Question 14

Profit

Answer 14

Revenue - Costs

= (MC-ATC)(Q) = (MR-ATC)(Q)

Question 15

Economies of Scale

Answer 15

When LRAC decreasing as output increases

Can order in bulk, specialize, etc. so efficiency is improving

Question 16

Diseconomies of Scale

Answer 16

LRAC is increasing as output increases

Coordination issues

Question 17

MES

Answer 17

Minimum Efficient Scale

When LRAC at minimum

Need to be at to be competitive in market

Question 18

Economies of Scope

Answer 18

When the total cost of producing two products within the same firm is lower than when the products are produced by separate firms

C(Q1,0) + C(0,Q2) > C(Q1,Q2)

Question 19

Cost Complimentary

Answer 19

When the marginal cost of producing one type of output decreases when the output of another good is increased
🔺MC1(Q1,Q2)/Q2 < 0

Production of doughnuts and doughnut holes

Question 20

Increasing Marginal Returns

Answer 20

Range where MPL increasing

Question 21

Négative Marginal Returns

Answer 21

Range where MPL is negative