Topic 6

Question 1

what is the formula for:

1. Profit
2. Total Revenue

Answer 1

Profit = Total Revenue - Total Costs

Total Revenue = Price x Quantity

Question 2

define ‘technology’

Answer 2

any input or process that allows more output to be produced for a given level of inputs (improvement in human capital + physical capital)

Question 3

what is the production function and state the formula

Answer 3

the relation between output (Q) and inputs for production (labor L and capital K)
Q = f(L,K)

Question 4

what is the short run production function (with formula)

Answer 4

the period during at least one factor of production remains fixed (assume labour changes and capital is fixed)
Q = f(L)

Question 5

what is average production (AP) w/ formula

Answer 5

measures how many units of output are produced per unit of labour input on average
AP = Q/L

Question 6

what is Marginal production w/formula

Answer 6

measures how many additional units of output were produced as a result of the last unit of labour being added
MP = Change in Q/Change in L

Question 7

explain the relationship between Average Production and Marginal Production

Answer 7

AP = average of MP
when MP > AP, ave increases
when MP < AP, ave decreases
MP cuts AP at it’s maximum

Question 8

The Law of Diminishing Returns:

• what does it explain
• describe the 3 stages

Answer 8

Explains what happens to TP when you begin from 0 labour and increase that
stage 1: each added L adds more TP than previous worker did (due to efficiency gains from specialisation)
Stage 2: each added L adds to TP but less than the previous added L - decreasing returns to labor but promotes expansion
STage 3: too much L with no space so production fails - negative returns to labour

Question 9

what is long run production

Answer 9

the period of time in which all factors of production are variable

Question 10

in long run production explain

1. constant returns to scale
2. increasing returns to scale
3. decreasing returns to scale

Answer 10

1. if you double all inputs, output doubles
2. if you double all inputs, output increases > double
3. if you double all inputs > output increases < double

Question 11

what is the formula for

1. Fixed Costs
2. Variable costs
3. Average Total Costs
4. Marginal Costs

Answer 11

Average Fixed Cost = total fixed cost/quantity
Average Variable Cost = Total Variable Cost / quantity
ATC = Total COst/ Quantity
MC = change in TC/ change in Q = Change in TVC/CHange (Q)

Question 12

what is the relationship between MC and Marginal Product

Answer 12

negative relationship. each new worker adds more output than previous (MP increases) than cost of workers (w) is spread over more units of output and MC falls