Exam 3
Discuss the difference between fixed inputs and variable inputs.
Fixed inputs are those for which the rate of use does not vary with the level of production output. Variable inputs are those that affect the level of output and vary with it.
In the rational range of production, the efficiency of the fixed factor is ________ while that of the variable factor is ________.
NONE OF THE ABOVE
A difference between economic profits and accounting profits would arise in the case of
Opportunity cost
Name the factors of production
The factors of production include natural resources (land), labor, capital, technology, and entrepreneurship.
The difference between economic profits and accounting profits is
opportunity cost
The "average" in average variable cost and average revenue means
per unit of output
The word "average" as in average revenue or average total cost means
per unit of output
In the trilogy of average, total, and marginal, "total" always means
per unit of the fixed input
Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?
physical space for the gallery
If the market price of the product is less than the minimum average total cost, the rational, perfectly competitive firm (in the short run) should
produce at a loss if possible in the rational range of production
At product prices less than the minimum average total costs, the perfectly competitive firm will
produce if the price is greater than the minimum average variable cost
A short-run relationship emphasizing the variable proportions between fixed and variable factors is a(n)
production function
For a perfectly competitive, profit maximizing firm, an increase in the fixed costs, ceteris paribus, would cause the
profits of the firm to fall
The typical, perfectly competitive, corn farmer has no control over each of the following in the short run EXCEPT
quantity of fertilizer
Production functions
shift with a change in technology
Output per unit of the fixed input is called
total physical product
Output per unit of the fixed factor of production is called
total product
In computing economic profit,
unpaid resources are valued at their opportunity cost
A farmer has cash costs of $1.50/bu for his corn. The opportunity cost of his labor is $0.30/bu and the opportunity cost of his land (which he owns) is $0.40/bu. If he sells his corn for $2.50/bu, then his economic profits are
$.30/bu
Farmer Dusty has 200 acres of corn land he plans to plant in the spring. He is trying to decide how much fertilizer to apply during the growing season.
A) His profit maximizing decision will be somewhere within the rational range of the production function. B) At the profit maximizing level of fertilizer use, both the average product and the marginal product of fertilizer will be declining. C) Knowledge of the production function alone is not sufficient information for making the decision. D) This is an example of short-run decision making.
A production function is...
A) a relationship between units of a variable input and units of output associated with a given fixed input bundle. B) a physical relationship determined by the technology used in the production process. C) represented as Y = f(X)
In a _______________ return production response, each additional unit of input yields an increase in production, but at a decreasing rate.
Decreasing
Describe the difference between implicit costs and explicit costs and between accounting profit and economic profit.
Explicit costs are out-of-pocket costs, while implicit costs represent the opportunity cost of using resources the firm already earns. Accounting profits are the difference between receipts and expenses for which payments are actually made (total revenue minus explicit costs). Economic profits are total revenue minus total costs including both implicit and explicit costs.
What is the difference between the short run and the long run in terms of production?
In the short run, some of the factors are considered to be fixed. In the long run, all factors are variable.
In a __________________ return production response, each additional unit of input returns a greater return than the previous unit.
Increasing
________________ arises where many firms are competing in a market to sell similar but differentiated products.
Monopolistic competition
For a firm in perfect competition, at the minimum of the average total cost curve
MC=ATC
In order to maximize short-run profit, the perfectly competitive firm should adjust output to that point at which
MR=MC
Describe the pattern of a typical production function in terms of general inputs and outputs.
The pattern of a typical production function is that as the level of input increases, the output increases at an increasing rate, then increases at a decreasing rate, reaches a maximum, then decreases.
What are the assumptions made in the simple factor-product model?
The simple factor-product model is a short run analysis in which there is one product and one variable factor of production that is used in combination with a bundle of fixed factors.
A production function describes the relationship between units of a variable input used in combination with a bundle of fixed factors and
Total Product
________ include all spending on labor, machinery, tools, and supplies purchased from other firms.
Total costs
_________ is calculated by taking the quantity of everything that is sold and multiplying it by the sale price.
Total revenue
__________ include all of the costs of production that increase with the quantity produced.
Variable costs
What is the objective of the firm manager, and what is the criterion for determining the output level in each of the following cases?
a. Loss minimization is the objective. If the price is less than the shut-down price, the firm is better off not producing anything because they cannot even cover any of their costs. b. Loss minimization is the objective. If the price is between the shutdown price and the break-even price, the firm will produce because they can cover variable costs and some of their fixed costs. c. Profit maximization is the objective. If the price is greater than the break-even price, the firm will be able to cover all of its costs (including opportunity cost) with money left over as profit.
In general, economic profits ________ accounting profits.
are less than
All costs of production per unit of output is
average total cost
The rational range of production begins at that level of output at which
average variable costs are minimized
A change in the fixed costs of the firm will cause a
change in average total costs at the profit maximizing output level
Which of the following falls outside of the classification of business expenditures that fall into the category of variable costs?
costs of research and development
Which of the following is NOT a characteristic of a production function?
depends on price of the product
Accounting profits and economic profits
differ with regards to expenditures versus values
At product prices between the shut-down point and the break-even point, the profit maximizing, perfectly competitive firm
earns negative profits
If the efficiency of the fixed factor is increasing and the efficiency of the variable is decreasing as additional units of the variable factor are added to the fixed factor, then the
firm is in the rational range of production
A production function
illustrates maximum technical or physical efficiency of the fixed input at the maximum total product
A production function
illustrates variable input proportions
At the initial phase (i.e., at the lowest output levels) of a production function, output
increases at an increasing rate
The total variable cost curve
is a mirror image of the production function
The profit maximizing/loss minimizing firm will cease production when the price of the product
is less than the break-even point
Within the rational range of production,
marginal physical product is always positive
When total physical product is maximized,
marginal physical product is zero
In the rational range of a production function, as use of the variable input increases,
marginal product decreases but is positive
The firm will engage in loss minimizing behavior if the
market price is greater than the shut-down price and less than the break-even price
In economics, a firm that faces no competitors is referred to as ...
monopoly
If the price of the product increases, ceteris paribus, the profit maximizing firm will use ________ of the variable input and produce ________ of output
more, more
The rational range of production begins at the
shut-down point
The "law of diminishing marginal product"
states that output eventually increases at a decreasing rate
At the break-even point
the economic profits of the firm are zero
If marginal revenue is above the minimum average total cost, then
the firm is earning economic profits
At prices above the shut-down price,
the firm will produce
The calculation of economic profit and accounting profit would not differ for
the purchase of fertilizer