Week 8 - Theory of the firm I: Cost functions and the long run input mix

Question 1

What is a Firm

Answer 1

A business organization that produces and sells goods/services with the primary goal of generating profit

Question 2

What are Sole traders and Partnerships

Answer 2

A single person/people that own, manage, and control the business with unlimited liability

Question 3

What is a Company

Answer 3

A legal entity, distinct from the owners, that sells goods/services to generate profit
Owners of shares have limited liability

Question 4

What 3 things determine Firm behaviour and Profits

Answer 4

1. Market demand for the good/service the firm produces
2. The firm’s cost of production
3. The market structure (competition)

Question 5

At which point is Revenue maximized on a Linear demand curve

Answer 5

Total revenue is maximized at the Q that is half-way to the point of intersection on the horizontal axis

Question 6

What are zero economic profits

Answer 6

Profit is equal to what profits would have been earned from the next best alternative

Question 7

What is the profit, total revenue and total cost formula (x3)

Answer 7

Profit: Pi(q) = TR(q) - TC(q)
Total revenue: TR(q) = P(q) x Q
Total cost: TC(q) = F + C x Q

Question 8

What are Total costs

Answer 8

The sum of all costs a company incurs to produce a certain level of output (TFC + TVC). Total costs never decrease with output.
1. fixed costs - costs that don’t vary with output
2. variable costs - costs that vary with output

Question 9

How do you find Profit maximisation quantity (x2)

Answer 9

1. Find the vertex of the parabola (- b^squared/2a)
   OR
2. calculate the first derivative of profit (to find marginal profit), set marginal profit equal to 0

Question 10

What shifts the Marginal revenue curve up

Answer 10

An upwards shift in the demand curve (consumers are willing at pay more at each Q)

Question 11

What shifts the Marginal cost curve up

Answer 11

An increase in the price of variable inputs e.g., (raw materials/labour)

Question 12

What is Short run and Long run

Answer 12

Short run - at least one factor of production is fixed
Long run - all factors of production are variable

Question 13

What is the Marginal product of labour

Answer 13

The change in output when we increase labour by one unit

Question 14

What formulas represent MPL for the short run production function (x2)

Answer 14

MPL = q(K0, L) - q(K0, L - 1)
OR
MPL = dq/dL

Question 15

What is the Average product of labour

Answer 15

The total output produced divided by the number of workers employed (average output per unit of labour)

Question 16

What formula represents APL for the short run production function

Answer 16

APL = q(K0, L) / L

Question 17

What is the relationship between Marginal and Average product of labour (x3)

Answer 17

When MPL > APL then APL is increasing
When MPL < APL then APL is decreasing
When MPL = APL then APL is at its maximum value

Question 18

What is the Productivity of labour

Answer 18

The average output per unit of labour (per worker or per hour)

Question 19

What formula represents the Total cost of production for a firm in the short run

Answer 19

C = (r x K0) + (w x L)

Question 20

In the short-run cost function, what determines the cost of producing output q (x3)

Answer 20

1. The price of the capital that was used in production
2. The price of labour that was used in production
3. The production technology

Question 21

What is the relationship between Average costs and Marginal costs

Answer 21

If MC > AC then AAC is increasing
If MC < AC then AC is decreasing
If MC = AC then AC is minimum