ECON Test # 2 (Chapter 8)

The law of diminishing returns refer to

diminishing marginal returns

An isoquant

is a curve that shows all the combinations of inputs that yield the same total output

When the average product is decreasing, marginal product

is less than average product suppose that the input is labor. If the marginal product of labor is below the average product of labor, then one additional (marginal) unit of labor will produce less output than average output produced by labor so this additional, less productive unit of labor will bring down the average product of labor in this case, it only matters whether the marginal product is above or below average

The function which shows combinations of inputs that yield the same output is called an

isoquant curve

Production function

shows the highest output that a firm can produce for every specified combination of inputs aka describes what is technically feasible when the firm operates efficiently

The law of diminishing marginal returns

states that as the use of an input increases with other inputs fixed the resulting addition to output will eventually decrease

Isoquants can cross each other

FALSE

According to the law of diminishing returns

the marginal product of an input will eventually decline Each additional unit of labor generates less and less additional output

If the isoquants are straight lines, then

the marginal rate of technical substitution of inputs is constant

An isoquant that is twice the distance from the origin represents twice the level of output

FALSE Only true if we have constant returns to scale An isoquant that is twice the distance from the origin uses twice as much input, therefore the output will be double only under constant returns to scale

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:

The marginal rate of technical substitution

What do we mean by the "short-run"?

a time period in which at least one input is fixed Period of time in which quantities of one or more production factors cannot be changed

If the law of diminishing returns applies to labor then

after some level of employment, the marginal product of labor must fall The law of diminishing returns refers to the marginal product, not average It states that it will eventually fall

If we take the productioin 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

when the isoquant graph looks like perfect compliments,

capital and labor will be used in fixed proportions only one combination of labor and capital can be used to produce a given output

If input prices are constant, a firm with increasing returns to scale can expect

costs to go up less than double as output doubles Increasing returns to scale = the firm can double its output by using less than double the amount of its inputs

If input prices are constant, a firm with decreasing returns to scale can expect

costs to more than double as output doubles

The average product of labor is the slope of the line

from the origin to the total product curve at that level of labor usage

A production function in which the inputs are perfectly substitutable would have isoquants that are

linear

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the

marginal rate at which the firm can replace capital with labor without changing the output rate

The marginal rate of technical substitution is equal to the

ratio of the marginal products of the inputs

The marginal product of labor is the slope of the line

that is tangent to the total product curve at that level of labor usage

The marginal rate of technical substitution is equal to:

the absolute value of the slope of an isoquant the ratio of the marginal product of the inputs

Marginal product

the addition to total output due to the addition of the last unit of an input, holding all other inputs constant

A straight line isoquant

would indicate that capital and labor are perfect substitutes in production. Thus the rate at which capital and labor can be substituted for each other is the same no matter what level of inputs is being used.

The marginal product of labor can be written algebraically as:

∆Q/∆L MPL is the slope (derivative) of Q with respect to changes in L