Econ Test 2
Suppose that the price of labor (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100?
100 = 10L + 20K
In a short-run scenario where capital is fixed, the cost of hiring one more employee is 80 dollars for one day's work. With this employee, the output of that day increases by 20 units. The marginal cost of production is ____________.
4
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost?
5 + (200/Q)
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable cost?
5Q
Joe owns a coffee house and produces coffee drinks under the production function Q=5KL where Q is the number of cups generated per hour, K is the number of coffee machines (capital) and L is the number of employees hired per hour (labor). What is the average product of labor?
AP=5K
Long run
Amount of time needed to make all production inputs variable
A fast food restaurant currently pays $5 per hour for servers and $50 per hour for rental machinery. When the ratio of marginal products (capital for labor) is 12, what adjustments are called for to improve the efficiency in resource use?
Increase capital or reduce labor
Which of the following inputs are variable in the long run?
Labor, Investment, Equipment, and Size of factory
The cost-output elasticity can be written and calculated as
MC/AC
Total product is maximized when
MP=0
For many firms, capital is the production input that is typically fixed in the short run. Which of the following firms would face the longest time required to adjust its capital inputs?
Nuclear power plant
Fixed input
Production factor that cannot be varied
Suppose capital and labor are perfect substitutes in a long-run production process. If labor costs $15 per hour and the rental rate of capital is $20 per hour, what can we say about the profit maximizing choice of labor and capital inputs?
We will only use labor in the production process
A firm's expansion path
a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices
To model the input decisions for a producion system, we plot labor on the horizontal axis and capital on the vertical axis. In the short run, labor is a variable input and capital is fixed. The short run expansion path for this production system is:
a horizontal line
The short run is
a time period in which at least one input is fixed
If the law of diminishing retturns applies to labor, then
after some level of employment, the marginal product of labor must fall
If the law of diminishing returns applies to labor then
after some level of employment, the marginal product of labor must fall.
If we take the production function and hold the level of output constant, allowing the amounts of capital and labor to vary, the curve that is traced out is called:
an isoquant.
In a short-run production process, the marginal cost is rising and the average total cost is falling as output is increased. Thus, marginal cost is
below average total cost.
With increasing returns to scale, isoquants for unit increases in output become:
closer and closer together
The following production function q = K + L exhibitsThe following production function q = K + L exhibits
constant returns to scale
Assume that a firm's production process is subject to increasing returns to scale over a broad range of outputs. Long-run average costs over this output will tend to
decline
Assume that a firm's production process is subject to increasing returns to scale over a broad range of outputs for a product. Marginal cost over this product will tend to
decrease
In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences
decreasing returns to scale.
If average cost is falling when output increases, it is
economies of scale
An iso-cost line reveals the
input combinations that can be purchased with a given outlay of funds
When the average product is decreasing, marginal product
is less than average product.
When the average product is decreasing, marginal product
is less then average product
Marginal product
is the instantaneous change (slope of the tangent line to each point of the total product curve)
In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,
marginal cost is below average variable cost
The slope of the total product curve is the
marginal product.
The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the
marginal rate of technical substitution.
The law of diminishing returns refers to diminishing
marginal returns
When an isocost line is just tangent to an isoquant, we know that
output is being produced at minimum cost.
Joe owns a small coffee shop, and his production function is q = 3KL where q is total output in cups per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). If Joe's capital is currently fixed at K=3 machines, what is his short-run production function?
q = 9L
A production function assumes a given
technology
When labor usage is at 12 units, output is 36 units. From this we may infer that
the average product of labor is 3.
The difference between the economic and accounting costs of a firm are
the opportunity costs of the factors of production that the firm owns.
The slope of iso-cost is
the price ratio between labor and capital
Firm A has a cost output elasticity of 0.7
there are economies of scale
A straight line iso-quant
would indicate that capital and labor are perfect substitutes in production
