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