Exam 2 #2

How is the LRAC found?

Points representing the minimum unit cost of producing any given rate of output assuming L And K are variable.

Economies of scale are illustrated by

A downward sloping long run average cost curve.

Constant returns to scale are illustrated by

A horizontal long-run average cost curve

What is true for a firm in the long run?

All costs are variable costs

Diseconomies of scale are illustrated by

An upward sloping long-run average cost curve.

When marginal product is greater than average physical product,

Average physical product is increasing

Why is LRAC important to the firm?

It is the "planning curve" in deciding for the firm to expand facilities or not. Firms must examine economies and diseconomies of scale to make long run decisions.

When a firm is at its minimum efficient scale of operation, it produces the

Minimum rate of output at which long-run average cost is minimized

Explain the shape of the short run marginal product of labor curve

The MPL curve is Hill shaped. MPL is increasing as the workers begin to specialize and adjust tasks according to division of labor. MPL begins to decrease when we add too much labor to a fixed amount of capital. This part is the diminishing marginal product.

Explain the long run average cost curve (LRAC)

U shaped due to economies of scale and diseconomies of scale. L and K are variable. As inputs increase, so do outputs.

For a hotdog vendor, the hotdog stand represents his

fixed input

The concept of the production function implies that a firm using resources inefficiently will

obtain less output than the theoretical production function shows

A firm's long-run average cost curve is

the locus of points representing the minimum unit cost of producing any given rate of output when all inputs may be adjusted

Explain the shape of the short run MC curve and average cost curves (ATC, AVC)

they are all U shaped due to diminishing marginal product. Increasing MPL, decreasing MC. MPL begins diminishing causing MC to rise. Average follows the margin so ATC and AVC are also U shaped. When MC is below AVC, AVC is brought down. When MC rises above AVC, AVC goes up

A negative value for the marginal physical product would indicate that

total output decreased when the extra unit of the variable input was added.

For a hotdog vendor, the hotdog buns represents his

variable input