Week 5

Question 1

What is an isoquant?

Answer 1

A curve showing all possible input combinations physically capable of producing a given level of fixed output.

Question 2

True or False:

Isoquants are upward sloping?

Answer 2

False, they are downward sloping.

Question 3

What is the formula for the slope of an isoquant?

Answer 3

🔺K/🔺L = MPl / Mpk

Question 4

What does MRTS stand for?

Answer 4

Marginal rates of technical substitution

Question 5

What is the formula for marginal rate of technical substitution?

Answer 5

MPl / MPk

Question 6

What is the definition of MRTS?

Answer 6

The slope of an isoquant that measures the rate at which two inputs can be substituted for another.

Question 7

What is the formula for MRTS?

Answer 7

MRTS = - 🔺K / 🔺L

Question 8

Why is a negative sign added to the beginning of the MRTS formula?

Answer 8

TO make the outcome positive as isoquant slopes are negative.

Question 9

As labor is substituted for capital, MPl inclines, or declines?

Answer 9

Declines.

Question 10

What is an isocost curve?

Answer 10

A curve that shows various combinations of inputs that may be purchased for a given level of expenditure (c) at given input prices (w,r).

Question 11

What is the K-intercept formula?

Answer 11

C/R

Question 12

What does tangent mean?

Answer 12

Best fit.

Question 13

What is the expansion path?

Answer 13

The curve or locus of points that shows the cost-minimizing input combination for each level of output.

Question 14

What is LTC?

Answer 14

Long run total cost

Question 15

What is the LTC formula?

Answer 15

wL + rK

Question 16

TRUE OR FALSE:

Falling LAC indicates economies of scale.

Answer 16

True.

Question 17

TRUE OR FALSE:

Rising LAC indicates diseconomies of scale?

Answer 17

True.

Question 18

What is LAC?

Answer 18

Long Run Average Cost

Question 19

What is the LAC formula?

Answer 19

LTC / Q

Question 20

What is the definition of Long run average costs?

Answer 20

Long run average cost measures the cost per unit of output when production can be adjusted so that the optimal amount of each input is employed.

Question 21

What is LMC?

Answer 21

Long run marginal cost.

Question 22

TRUE OR FALSE :

LMC lies above LAC when LAC is falling?

Answer 22

False.

Question 23

What is the Long run marginal cost formula?

Answer 23

🔺LTC / 🔺Q

Question 24

TRUE OR FALSE :

LMC = LAC at the minimum value of LAC?

Answer 24

True.

Question 25

What are economies of scale?

Answer 25

They occur when long-run average cost falls as output increases.

Question 26

What are scale economies?

Answer 26

Scale economies arise when quasi-fixed costs are spread over more units of output, causing LAC to fall.

Question 27

What are diseconomies of scale?

Answer 27

Occur when long-run average cost (LAC) rises as output increases.

Question 28

What are constant costs?

Answer 28

A point at which neither economies or diseconomies of scale are occurring.

Question 29

What is the minimum effect scale?

Answer 29

The lowest level of output needed to reach the minimum value of long-run average cost.

Question 30

What is the minimum efficient scale?

Answer 30

The level of output at which all economies of scale are exhausted.

Question 31

WHat are constant returns to scale?

Answer 31

The situation when a firms long-run average costs remain unchanged as it increases output.