BECO-3310 Test 3 Review

What is the production function? What does it tell us?

"A function that defines the maximum amount of output that can be produced with a given set of inputs." (Only 2 inputs, labor and capital, are used to produce output, Q.)

Average Product of Captial

APK = Q/K

Average Product of Labor

APL = Q/L

What is the principal-Agent problem?

Agents do not have incentives to work for the good of the company and work in their self-interest.

Average Total Cost (ATC) =

Average Fixed Cost (AFC) + Average Variable Cost (AVC)

Revenue-Sharing

tips, sales commission, auto/home sales %, etc.

time clocks

used to collect the total amount of time that each employee worked during a particular pay period

piece rates

A payment system where employees are paid an agreed rate for every item produced

How are fixed costs and sunk costs related?

A sunk cost is a cost that is "lost forever", once it is paid. (Ex.: If a company pays $5,000 for a leased truck to transport raw materials, once the money is paid, it doesn't matter whether the company uses it or not, the $5,000 is a sunk cost)

Long-run competitive equilibrium

In the long run, perfectly competitive firms produce a level of output such that 1.P=MC 2.P=minimum of AC

Spot Exchange

Informal relationship between buyer and seller, no expectation of future transactions. Transaction occurs without any formal or legal relationship between the parties.

Contract

Legal document specifies term, range of services, price and other important elements of transactions between buyers and sellers.

Marginal Product of Capital

MPK = ΔQ/ΔK

Marginal Product of Labor

MPL = ΔQ/ΔL

what is meant by the marginal rate of technical substitution? Where does cost minimization occur?

MPL/w = MPK/r

Site Specificity

Plant location close to one another

Rothchild Index

R = Er / Ef; 0 < R < 1

What is meant by market structure? Why is it important to decision makers?

Refers to characteristics of a market (industry) such as the number of firms competing with one another, the relative size of firms, technology and cost conditions, the existence of market power (or not), whether new firms can easily enter the market (or not)

Short Run vs. Long Run Costs

Short-run = At least one input is fixed. ° Only having one oven Long-run = All inputs are variable. ° Having more than one oven

What is the difference between short-run and long-run?

Short-run: some of the production inputs are fixed which provides constraints to decision making. A manufacturer could change variable inputs, but not things like change in production or production processes. Long-run: It is possible to adjust ALL factors of production.

Total Product

TP or Q

Short-run output decision under perfect competition

To maximize short-run profits, a perfectly competitive firm should produce in the range of increasing marginal cost where P=MC, provided that P>/=AVC. If P<AVC, the firm should shit down its plant to minimize its losses.

What is meant by the value marginal product of input (labor or capital)?

To maximize profits, managers should use inputs where the marginal benefit from using the input is equal to the marginal cost of the input.

Total Costs (TC) =

Total Fixed Costs + Total Fixed Costs

Hire capital until the value of marginal product of capital equals the rental rate:

VMPK = r, where VMPK = P * MPK

Hire labor until the value of marginal product of labor equals the wage:

VMPL = w, where VMPL = P * MPL.

Human Capital

Workers must learn specific skills to work an input supplier firm

Herfindahl-Hirschman Index (HHI)

an index of market concentration found by summing the square of percentage shares of firms in the market; 0 < HHI < 10,000

Physical Asset Specificity

capital required to produce input is designed to meet needs of a particular buyer, not easily adapted.

Marginal Cost (MC) =

change in TC/change in Q

Marginal Product of an Input

change in total output attributable to the last unit of an input.

spot checks

checks done without warning to ensure the workers are doing their jobs correctly and for the benefit of the company.

Incentive Structures

conditions which reward some behaviors while punishing others

How do accountants and economists think differently about the short-run and long-run?

economists: at least one of your inputs is fixed in the short-run (typically assume capital) long-run-- everything is variable accountants: on a balance sheet, anything due within a year is considered short-term

Dedicated Assets

general investments allow firm to exchange with a particular buyer

Profit-Sharing

incentive pay in which payments are a percentage of the organization's profits and do not become part of the employees' base salary

Conglomerate Mergers

involves the integration of different product lines into a single firm.

Average Product of Input

measure of output produced

What is meant by economies of scale? scope?

occurs when long-run average cost decline as output is increased.

4 firm concentration ratio

output of four largest firms / total output in the industry; 0 < C4 < 1

Vertical Integration

refers to a situation various stages in the production of a single product are carried out in a single firm.

Horizontal Integration

refers to the merging of the production of similar products into a single firm.

negative marginal returns

the addition of one more unit of the variable input, in the short-run, causes total output to decrease.

decreasing (diminishing) marginal returns

the addition of one more unit of the variable input, in the short-run, causes total output to increase at a decreasing rate.

increasing marginal returns

the addition of one more unit of the variable input, in the short-run, causes total output to increase at an increasing rate.