ECON 315 - Exam 2
Costs that are forever lost after they have been paid are called...
Sunk costs - even after you leave the business, they are lost
ATC (Q) =
TC / Q
Profits = TR - TC...
TR = P x Q TC = wL + rK
A production function represents...
The technology available for turning inputs into output
Under CONSTANT returns to scale...
A given percentage hang in ALL inputs causes an equal percentage change in output
ATC =
AFC + AVC
Which curves do the marginal cost curve intersect at their minimum point?
ATC & AVC
Long-run profit maximizing level of output...
- MPPL / MPPK - Find answer, plug in w and r - Find answer, plug into production function
As we move DOWNWARDS along the isoquant,
- MRTS diminishes since the slope gets flatter - It takes more labor to substitute each machine - L (and not K) becomes less productive (law of diminishing product happens when we add more labor)
At the point of cost-minimization...
- The isoquant is tangent to the isocost - MRTS = w/r - MPPL/MPPK = w/r
MRTS (Marginal Rate of Technical Substitution)
- ΔK / Δ L - Take the absolute value
The marginal product of an input is defined as...
Change in total output attributable to the last unit of an input
Fixed costs (FC)...
Do not vary with output, so the graph is a horizontal line
The difference between TC and VC is...
FC
TC =
FC + VC
AFC =
FC / Q
If MRTS < w/r, you should...
Hire less labor and more capital
If the graph of MPPK is negatively sloped but is still positive (above x-axis), this means that adding more K...
INCREASES total output, but at a slower rate
If we move DOWNWARD along an isoquant, what happens to MRTS?
It decreases - It's slope decreases & gets flatter - We need more L (labor gets less productive) to replace 1 unit of K (capital gets more productive)
If the wage rate INCREASES, what will happen to the isocost line?
It will become steeper - The horizontal intercept is now a smaller number
If the price of K DECLINES and at the same time higher taxes are imposed on employers, what will happen to the isocost line?
It will become steeper & shift inwards - the price of capital declining makes isocost steeper - taxes on firms means that businesses' budget (C) declines, which causes an inward shift
If your budget (C) as a manager DECREASES, what happens to the isocost line?
It will shift inward - slope of isocost (determined by w/r), does not change
Which production function has inputs that are perfect substitutes?
Linear production
Tangency Condition: are you at the optimal point, or should you hire more labor, less labor, etc?
MPPL / MPPK = w/r - so MPPL/w = MPPK/r - plug in... see if labor productivity is lower than capital productivity, and visa versa
Total product begins to fall when...
Marginal product is negative
Isoquants are normally drawn with a CONVEX shape because inputs are...
NOT perfectly substitutable - If inputs are perfectly substitutable, isoquants would be straight downward sloping line
If a good is produced only by manual L, the graph of the isoquant will be...
Perfectly vertical - K is a useless input
If the last unit of input INCREASES total product, the marginal product is
Positive
Variable cost (VS) function...
Starts at zero (if Q=0, then VC=0)
Fixed costs...
Stop occurring the moment the firm leaves the business
AVC =
VC / Q
If the graph of a production function which uses only L is a LINEAR function, then the slope of MPPL is...
Zero - A straight horizontal line, with a slope of 0
As Q increases, AFC...
decline
Isocosts are...
different combinations of L and K that cost the same amount of money (C)
Isoquants are...
different combinations of L and K that produce the same output (Q)
As Q increases, AVC & ATC...
get closer together
MC goes through...
lowest point of ATC & AVC
Slope of an Isocost =
w/r or ΔK/ΔL
MC =
Δ TC / Δ Q = dTC / dQ = dVC / dQ
