Week 5

Question 1

what does it mean if the firm chooses inputs to maximise efficiency

Answer 1

minimise their cost which is economically efficient

Question 2

isocost line

Answer 2

all the inputs that require the same total expenditure

Question 3

Lowest isocost rule

Answer 3

lowest level of inputs where the lowest isocost line touches the isoquant

Question 4

minimising costs

Answer 4

to produce outputs at the lowest cost the firm uses information about the production function and the price of labour and capital

Question 5

why are the long run costs lower than short run

Answer 5

firms only uses the amount of labour to use when the capital is fixed in the long run
both inputs are variable

Question 6

what does the isoquant line contain

Answer 6

all the information about costs

Question 7

what does isoquant line contain

Answer 7

all the information about efficient production

Question 8

marginal rate of technical substitution

Answer 8

rate at which the firm can trade capital for labour in input markets equal the rate at which it can trade capital for labour

Question 9

tangency rule

Answer 9

if isocost crosses isoquant twice, another lower isocost line must also touch the isoquant

Question 10

last dollar rule

Answer 10

cost is minimised if inputs are chosen so that the last dollar spent on labour adds as much extra output

Question 11

does the change in factor prices affect the slopes of the isoquant or isocost lines

Answer 11

no

Question 12

long run expansion path

Answer 12

curve through the tangency points

Question 13

why is the ac initially downward sloping

Answer 13

because the firm has no fixed costs in the long run it is determined by the production function relationship between output and input
returns to scale play a major role in determining the average cost curves

Question 14

production possibility frontier

Answer 14

max outputs that can be produced from the fixed amount of output