Econ producer theory quiz

what is a production function

the mathematical relationship between inputs and outputs

what does it mean to be in the short run

The period of time is so short that at least one factor of production is fixed. Production occurs with both fixed and variable inputs

what does it mean to be in the long run

The period of time is so long that all inputs can be varied. Firms are free to enter or exit at no cost.

marginal product of labor

additional output that is associated with one unit increase of labor, holding all other inputs fixed

average product of labor

the average output per unit of labor used

breakeven point of labor

when the dollar value of a worker’s marginal product of labor is equal to their wage

what factor is most important when considering hiring more workers?

The marginal product of labor, MPL occurs in three ‘phases’, and firms are expected to stop hiring when the marginal product of labor is less than or equal to 0

what factors influence a firm’s choices in the long run?

production technology, cost of inputs, and price of outputs

isoquant

a curve representing the set of K and L combinations that make the same quantity of output

marginal rate of technical substitution

the rate at which a firm is willing to trade one factor of production for another, this is the slope of an isoquant expressed as -MPL/MPK

what is returns to scale

the impact of the quantity of output when firms change all inputs by the same rate

increasing returns to scale

outputs increase by a rate larger than the rate at which inputs were increased (example: doubled inputs creates more than doubled outputs)

constant returns to scale

the outputs increase at the same rate as the inputs (example: doubled inputs create doubled outputs)

decreasing returns to scale

outputs increase at a rate less than the rate at which inputs are increased (example: doubled inputs create less than doubled outputs)

how do improvements in production technology impact isoquants

the isoquant is shifted to the left because less inputs are required to make the same amount of output

accounting cost

the cost of inputs is measured by what the firm pays for them

economic cost

the amount of money required to keep an input in its current use, rather than opting for the next best alternative

what does the letter ‘v’ stand for

the rental rate of capital

what does the letter ‘w’ stand for

the labor rate of wages

sunk cost

expenses already paid that cannot be recovered, these only exist in the short run

isocost

a curve representing different combinations of K and L that yield the same total cost

cost minimization point

the combination of K and L that makes the desired amount of output at the lowest total cost; this is the tangent point where the slope of the isoquant is equal to the slope of the isocost

what is optimal scale

a realistic scenario in which firms start small and expand, having increasing returns to scale, but after a certain point of expansion they run into challenges and have decreasing returns to scale

fixed costs

costs associated with fixed inputs in the short run

variable costs

costs associated with variable inputs in the short run

profit maximization

the quantity of output a firm can generate that covers the costs of inputs while maximizing revenue

total revenue

the total amount of money a firm gets from selling its outputs

marginal revenue

the money a firm gets from selling an additional unit of output

average revenue

the revenue gained per unit of output sold

when should a firm expand the quantity of output it produces

when the marginal cost of producing another unit of output is less than the marginal revenue gained by selling that unit of output

when should a firm stop expanding its quantity of output

when the marginal price of an additional unit of output is equal to its marginal revenue