Econ 812 - Production Economics: Lesson 3
If MP labor = AP labor then AP is _____
Constant
________isoquants mean that some units of one factor can be substituted for a unit of the other factor while keeping production at the same level.
Convex
_____ Describes how a firm can replace one input with another and still achieve the same output
MRTS - marginal rate of technical substitution
additional output generated by adding additional input (workers)
Marginal Product
Change in output / Change in labor =
Marginal Product of Labor
__ Shows the relationship between the quantities of various inputs used and the maximum output that can be produced with those inputs
Production Function
_____ tells us the amount of output for each specified combination of inputs
Production function
______________tells us the maximum output for each level of input
Production function
_______________ also help managers to determine the optimum combination of labor and capital and other inputs.
Returns to scale
The marginal rate of technical substitution is equal to the ratio of the marginal products of the inputs. (T/F)
True
· Product transformation curve - shows combinations of two outputs that can be produced with given fixed set of inputs
economies of scope
APL starts to decline when AP ___ MP
equals
MRTS equals the negative of the slope of the ______, change in K / change in L, holding Q contant
isoquant
all combinations of labor and capital that yield the same level of output
isoquant
with two inputs, we can graph ___________ of the production function in two dimensions
isoquants
the greater the returns to scale, the _____ the firms in an industry are likely to be.
larger
rate of increase in output will get smaller, after a point, as additional input is added
law of diminishing returns
__________ Isoquants, The factors are perfect substitutes.
linear
In the ____ run, all input levels can be adjusted
long
slope of the production function measures _____
marginal product
additional output resulting from the addition of one more unit of labor
marginal product of labor
slope of the production function is ____________
marginal product or marginal returns
Managers should know how many workers to hire, they can measure this by the _________ concept
marginal productivity
Profit maximization requires hiring workers until the cost of an additional worker equals the value of their ______________
marginal productivity
Marginal product must equal the average product when the average product reaches its maximum
maximum
Returns to scale need not be uniform across all possible levels of ___________
output
In the short-run, at least one factor of ____ is fixed
production
___________ function summarizes the link between inputs of production and quantity of output processed.
production
a company's costs reflect its ____________ process
production
Slope of the ______________ measures marginal product or marginal returns
production function
To maximize profits, mangers should know the _______ of their production process
production function
the relationship between the quantity of inputs used to make a good or provide service (mostly labor and capital) and the quantity of output of that good or service.
production function
Difference between short run and long run is not based on time, it depends upon the characteristics of the __________
production units
Measures of ___________________: Increasing marginal returns Decreasing marginal returns Negative marginal returns
productivity
Firms' main goal in making these decisions is to maximize _____
profit
Diminishing returns is not the same as ______
returns to scale
When all factor inputs are increased in proportion, we describe the magnitude of the resulting output change using the concept
returns to scale
____________ is the rate at which output increases as inputs are increased proportionately.
returns to scale
When there is diminishing marginal product of any input in the production technology of any company, the total cost curve of the company gets steeper and steeper as output _____.
rises
If curve is bowed out (convave) = economies of ____________
scope
in the ____ run, the firm has some fixed inputs
short
in the ______ run, the use of at least one factor or production cannot be adjusted
short
Diminishing marginal returns is a ____ concept, b/c deals with response of output to changes in a single input.
short run
_____ of labor is one important source of increasing returns to scale -- as the firm grows, workers don't have to perform multiple tasks and can become more efficient (or more efficient use of equipment)
specialization
the isoquant must become _______as more capital is added in place of labor and _______when labor is added in place of capital
steeper, flatter
Isoquant inputs that are perfect substitutes, we see a ____ line
straight
Along the same isoquant, the production level is always ________________.
the same
the market value of the inputs a firm uses in production, including wages, capital cost, rents, and costs of intermediate or raw materials
total cost
the amount a firm receives for the sale of its output
total revenue
If doubling all inputs causes output to double exactly, then we see
constant returns to scale
If MP labor < AP labor, then _____ will fall as labor input increases
AP labor
If MP labor > AP labor, _____ increases as labor input increases
AP labor
___ is defined as Q/L
APL - average product of labor
output per unit of labor
Average product of labor
If doubling all inputs causes output to double, there are ____ returns to scale
constant
· Joint output of single firm < output by separate firms when each produces single product
Diseconomies of scope
· Joint output of single firm is > output by two firms each producing a single product
Economies of scope
A straight-line isoquant is impossible. (T/F)
False
An examination of the production isoquants in the diagram below reveals that capital and labor are perfectly substitutable. (L-Shaped) T/F
False
If a technology exhibits decreasing returns to scale, then it also exhibits diminishing returns. (T/F)
False
We manufacture automobiles given the production function q = 5KL, where q is the number of autos assembled per 8-hour shift, K is the number of robots used on the assembly line (capital), and L is the number of workers hired per hour (labor). If we use K = 10 robots and L = 10 workers in order to produce q = 450 autos per shift, then we know that production is technologically efficient. (T/F)
False
When labor usage is at 12 units, output is 36 units. From this we may infer that the average product of labor is 12/36. (T/F)
False (36/12)
Restricting focus to two variables, we can use ____ to summarize how different levels of inputs might be combined to produce a given output level
Isoquants
________show the flexibility that firms have when making production decisions.
Isoquants
_____________ Isoquants, mean that the factors are perfect complements. The firm produces under a fixed-proportions type of technology.
L - shaped
Isoquant inputs that are perfect compliments, we see a ___ line
L-shaped
Factors of production
Labor, capital, material
holding all inputs fixed except one, and continually increasing the remaining input, a point will be reached at which the rate of increase in output begins to fall.
Law of diminishing returns
MRTS also equals the ratio of:
MP labor / MP kapital
Additional output that is produced when labor is increased by one unit
MPL -- marginal product of labor (change in Q / change in L)
As you move down along the isoquant, the value of ________declines
MRTS
a declining ________________ can determine the input allocation of firms.
MRTS
change in K / change in L = ____________ (holding Q constant)
MRTS
the rate at which a producer can substitute between two inputs and maintain the same level of output
MRTS
_ Describes how capital and labor can be substituted, so that output remains constant
MRTS (Marginal rate of technical substitution)
maximum level of output that can be produced with a given amount of inputs
Total product
A bakery operating in the short run has found that when the level of employment in its baking room was increased from 4 to 6 in increments of one, its corresponding levels of production of bread were 110, 115, and 122. The marginal product of labor when the employment increases from 5 to 6 is 7. (T/F)
True
Diminishing returns is not the same as returns to scale.
True
If a firm uses only labor to produce, and the production function is given by a straight line, then the marginal product of labor always equals the average product of labor as labor employment expands. (T/F)
True
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. (T/F)
True
The function which shows combinations of inputs that yield the same output is called an isoquant curve. (T/F)
True
If Isoquants are parallel straight lines = MRTS is
constant (assembly line)
labor productivity AKA
average product of labor
When the slope of the product function is declining, marginal product ________
declines
When the marginal product is less than the average product, the average product is
decreasing
if doubling all inputs causes output to less than double, we see ___ returns to scale
decreasing
if doubling all inputs causes output to rise by less than double, we see __________ (difficulties in management as organization grows more complex)
decreasing returns to scale
· % of lost savings when two or more products are produced jointly
degree of economies of scope
increase in the slope of the total cost curve is due to ___________
diminishing marginal product
As you add variable resources to fixed resources the ADDITIONAL OUTPUT will eventually decrease
diminishing marginal returns
When marginal product begins to fall, we see
diminishing returns
As labor increases and capital decreases along an isoquant, what happens to MRTS?
falls
as the amount of labor used increases, the marginal product of labor _____.
falls
diminishing marginal returns are the result of ________, and therefore a short-run phenomenon
fixed inputs
If Isoquants are L-shaped, we see ______ production
fixed proportions (hands, keyboard)
When the marginal product of labor is greater than the average product, the average product of labor ________.
increases
If doubling all inputs causes output to more than double there are ____ returns to scale
increasing
When marginal product is greater than the average product, the average product is
increasing
When the slope of the product function is increasing, marginal product is __________
increasing as well
Doubling all inputs causes output to more than double
increasing returns to scale
Many companies experience ____ returns to scale over some initial range of output and then perhaps experience ___ returns to scale as they become large scale operations
increasing, decreasing
marginal product of an input is the slope of the production function, showing the link between the _____ and _____
input and output
