Chapter 6 - 7 - 8

Production function

A mathematical representation that shows the maximum quantity of output a firm can produce given the quantities of inputs that it might employ.

Total Product Function

A production function. A total product function with a single input shows how total output depends on the level of the input.

chapter 8 - Deriving Long- Run Average and Marginal Cost Curves from the Long-Run Total Cost Curve

Although long-run average and marginal cost are both derived from the firm's long-run total cost curve, the two costs are generally different, as illustrated in Fig- ure 8.7. At any particular output level, the long-run average cost is equal to the slope of a ray from the origin to the point on the long-run total cost curve corresponding to that output, whereas the long-run marginal cost is equal to the slope of the long- run total cost curve itself at that point. Thus, at point A on the total cost curve TC(Q) in Figure 8.7(a), where the firm's output level is 50 units per year, the average cost is equal to the slope of ray 0A, or $1500/50 units = $30 per unit. By contrast, the marginal cost at point A is the slope of the line BAC (the line tangent to the total cost curve at A); the slope of this line is 10, so the marginal cost when output is 50 units per year is $10 per unit. Figure 8.7(b) shows the long-run average cost curve AC(Q) and the long-run marginal cost curve MC(Q) corresponding to the long-run total cost curve TC(Q) in Figure 8.7(a). The average cost curve shows how the slope of rays such as 0A changes as we move along TC(Q), whereas the marginal cost curve shows how the slope of tangent lines such as BAC changes as we move along TC(Q). Thus, in Figure 8.7(b), when the firm's output equals 50 units per year, the average cost is $30 per unit (point A') and the marginal cost is $10 per unit (point A"), corresponding to the slope of ray 0A and line BAC, respectively, at point A in Figure 8.7(a).

A long-run total cost curve a) always has a constant slope. b) is always upward sloping. c) never has a constant slope. d) is always downward sloping.

Ans: B

chapter 8 - Explain why the short-run marginal cost curve must intersect the average variable cost curve at the minimum point of the average variable cost curve.

Because fixed cost does not change, marginal costs reflect the change in variable costs. Thus, as with the relationship between any average and marginal, if average variable cost is decreasing, marginal cost must be below average variable cost, and if average variable cost is increasing, marginal cost must lie above average variable cost. This implies marginal cost will intersect average variable cost at the minimum of average variable cost.

Chapter 7 - Cost Minimization

Cost minimization problem: Finding the input combination that minimizes a firm's total cost of producing a particular level of output. Cost minimization firm: A firm that seeks to minimize the cost of producing a given amount of output. Long run: A period of time when the quantities of all of the firm's input can vary. Short run: A period of time when at least one of its inputs' quantities is fixed.

Chapter 7 - nonsunk costs

Costs that are incurred only if a particular decision is made.

Chapter 7 - implicit costs

Costs that do not involve outlays of cash.

Chapter 7 - sunk costs

Costs that have already been incurred and cannot be recovered. (these are not part of opportunity cost)

Chapter 7 - explicit costs

Costs that involve a direct monetary outlay. e.g payroll

law of diminishing marginal returns

Principle that as the usage of one input increases, the quantities of other inputs being held fixed, a point will be reached beyond which the marginal product of the variable input will decrease.

chapter 8 - Suppose the graph of the average variable cost curve is flat. What shape would the short-run marginal cost curve be? What shape would the short-run average cost curve be?

If the average variable cost curve is flat, average variable cost is neither increasing nor decreasing. Marginal cost will therefore be equal to average variable cost and the marginal cost curve will therefore also be flat. Since average fixed cost is always declining, and since average total cost is the vertical sum of average variable and average fixed costs, average total cost must also be declining at all levels of Q if average variable cost is constant. Graphically, average total cost will be declining and asymptotic to the average variable cost curve.

Average product of labor

The average amount of output per unit of labor. The average product of an input is equal to the total output that is to be produced divided by the quantity of the input that is used in its production: APl = Q/L APk = Q/K

What is the difference between average product and marginal product? Can you sketch a total product function such that the average and marginal product functions coincide with each other?

The average product of labor is the average amount of output per unit of labor. The marginal product of labor is the rate at which total output changes as the firm changes its quantity of labor.

chapter 8 - long-run marginal cost

The rate at which long-run total cost changes with respect to change in output.

marginal product of labor

The rate at which total output changes as the quantity of labor the firm uses is changed.

diminishing marginal returns to labor

The region along the total prod- uct function in which output rises with additional labor but at a decreasing rate.

diminishing total returns to labor

The region along the total product function where output decreases with additional labor.

Chapter 7 - opportunity cost

The value of the next best alternative that is forgone when another alternative is chosen. The only alternative we consider is the best alternative

chapter 8 - The Relationship between the Long-Run Average and Marginal Cost Curves and the Short-Run Average and Marginal Cost Curves

When the firm's short-run and long-run average costs are equal, its short- run and long-run marginal costs must also be equal.

What is the difference between diminishing total returns to an input and diminishing marginal returns to an input? Can a total product function exhibit diminishing marginal returns but no diminishing total returns?

With diminishing total returns to an input, increasing the level of input will decrease the level of total output holding the other inputs fixed. Diminishing marginal returns to an input means that as the use of that input increases holding the quantities of the other inputs fixed, the marginal product of that product will become less and less. Essentially, diminishing total returns implies that the output is decreasing while with diminishing marginal returns we could have output increasing, but at at a decreasing rate as the amount of the input increases.

chapter 8 - If the average cost curve is increasing, must the marginal cost curve lie above the average cost curve? Why or why not?b) If the marginal cost curve is increasing, must the marginal cost curve lie above the average cost curve? Why or why not?

a. When MC > AC , average cost is increasing, and when MC < AC , average cost is decreasing. So, if the average cost curve is increasing it must lie below the marginal cost curve. b) If the marginal cost curve is increasing, it may lie above or below the average cost curve. The only determining factor here is whether or not marginal cost lies above or below average cost. If it lies above, average cost will be increasing and if it lies below, average cost will be decreasing. Knowing that marginal cost is increasing or decreasing tells us nothing about average cost.

The long-run total cost curve tends to a) rotate upward when input prices fall. b) rotate upward when input prices rise. c) shift vertically upward by a fixed amount. d) shift vertically downward by a fixed amount.

b) rotate upward when input prices rise.

The cost of producing a good in a single-product firm is a) additional cost b) stand-alone cost c) variable cost d) average cost

b) stand-alone cost

chapter 8 - A firm's long-run average cost curve is comprised of: a) the minimum points of each of the firm's short-run average cost curves. b) the lower envelope of the firm's short-run average cost curves. c) the minimum points of each of the firm's short-run marginal cost curves. d) the series of points where the short-run marginal cost curves intersect the short- run average cost curves.

b) the lower envelope of the firm's short-run average cost curves.

chapter 8 - An indivisible input is a) an input that cannot be seen by the naked eye. b) an important input that the firm cannot identify. c) an input that can only be obtained in a certain minimum size. d) an input the firm cannot stop using.

c) an input that can only be obtained in a certain minimum size.

chapter 8 - long-run average cost

he firm's total cost per unit of output. It equals long-run total cost divided by total quantity.

We said that the production function tells us the maximum output that a firm can produce with its quantity of inputs. Why do we include the word maximum in its definition?

the production function tells us the maximum output that a firm can produce with its quantity of inputs. it is possible that the firm might produce less than this amount of output due to inefficient management resources. While it is possible to produce many levels of output with the same levels of inputs some of which are less technically efficient than others, the production function gives us the upper bound on (the maximum of) the level of output.

The Production Function & Technical Efficiency

• Technically efficient: Sets of points in the production function that maximizes output given input (labor) Q = f (L,K) • Technically inefficient: Sets of points that produces less output than possible for a given set of input (labor) Q < f (L,K)