Exam 3

Discuss the difference between fixed inputs and variable inputs.

Fixed inputs are those for which the rate of use does not vary with the level of production output. Variable inputs are those that affect the level of output and vary with it.

In the rational range of production, the efficiency of the fixed factor is ________ while that of the variable factor is ________.

NONE OF THE ABOVE

A difference between economic profits and accounting profits would arise in the case of

Opportunity cost

Name the factors of production

The factors of production include natural resources (land), labor, capital, technology, and entrepreneurship.

The difference between economic profits and accounting profits is

opportunity cost

The "average" in average variable cost and average revenue means

per unit of output

The word "average" as in average revenue or average total cost means

per unit of output

In the trilogy of average, total, and marginal, "total" always means

per unit of the fixed input

Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?

physical space for the gallery

If the market price of the product is less than the minimum average total cost, the rational, perfectly competitive firm (in the short run) should

produce at a loss if possible in the rational range of production

At product prices less than the minimum average total costs, the perfectly competitive firm will

produce if the price is greater than the minimum average variable cost

A short-run relationship emphasizing the variable proportions between fixed and variable factors is a(n)

production function

For a perfectly competitive, profit maximizing firm, an increase in the fixed costs, ceteris paribus, would cause the

profits of the firm to fall

The typical, perfectly competitive, corn farmer has no control over each of the following in the short run EXCEPT

quantity of fertilizer

Production functions

shift with a change in technology

Output per unit of the fixed input is called

total physical product

Output per unit of the fixed factor of production is called

total product

In computing economic profit,

unpaid resources are valued at their opportunity cost

A farmer has cash costs of $1.50/bu for his corn. The opportunity cost of his labor is $0.30/bu and the opportunity cost of his land (which he owns) is $0.40/bu. If he sells his corn for $2.50/bu, then his economic profits are

$.30/bu

Farmer Dusty has 200 acres of corn land he plans to plant in the spring. He is trying to decide how much fertilizer to apply during the growing season.

A) His profit maximizing decision will be somewhere within the rational range of the production function. B) At the profit maximizing level of fertilizer use, both the average product and the marginal product of fertilizer will be declining. C) Knowledge of the production function alone is not sufficient information for making the decision. D) This is an example of short-run decision making.

A production function is...

A) a relationship between units of a variable input and units of output associated with a given fixed input bundle. B) a physical relationship determined by the technology used in the production process. C) represented as Y = f(X)

In a _______________ return production response, each additional unit of input yields an increase in production, but at a decreasing rate.

Decreasing

Describe the difference between implicit costs and explicit costs and between accounting profit and economic profit.

Explicit costs are out-of-pocket costs, while implicit costs represent the opportunity cost of using resources the firm already earns. Accounting profits are the difference between receipts and expenses for which payments are actually made (total revenue minus explicit costs). Economic profits are total revenue minus total costs including both implicit and explicit costs.

What is the difference between the short run and the long run in terms of production?

In the short run, some of the factors are considered to be fixed. In the long run, all factors are variable.

In a __________________ return production response, each additional unit of input returns a greater return than the previous unit.

Increasing

________________ arises where many firms are competing in a market to sell similar but differentiated products.

Monopolistic competition

For a firm in perfect competition, at the minimum of the average total cost curve

MC=ATC

In order to maximize short-run profit, the perfectly competitive firm should adjust output to that point at which

MR=MC

Describe the pattern of a typical production function in terms of general inputs and outputs.

The pattern of a typical production function is that as the level of input increases, the output increases at an increasing rate, then increases at a decreasing rate, reaches a maximum, then decreases.

What are the assumptions made in the simple factor-product model?

The simple factor-product model is a short run analysis in which there is one product and one variable factor of production that is used in combination with a bundle of fixed factors.

A production function describes the relationship between units of a variable input used in combination with a bundle of fixed factors and

Total Product

________ include all spending on labor, machinery, tools, and supplies purchased from other firms.

Total costs

_________ is calculated by taking the quantity of everything that is sold and multiplying it by the sale price.

Total revenue

__________ include all of the costs of production that increase with the quantity produced.

Variable costs

What is the objective of the firm manager, and what is the criterion for determining the output level in each of the following cases?

a. Loss minimization is the objective. If the price is less than the shut-down price, the firm is better off not producing anything because they cannot even cover any of their costs. b. Loss minimization is the objective. If the price is between the shutdown price and the break-even price, the firm will produce because they can cover variable costs and some of their fixed costs. c. Profit maximization is the objective. If the price is greater than the break-even price, the firm will be able to cover all of its costs (including opportunity cost) with money left over as profit.

In general, economic profits ________ accounting profits.

are less than

All costs of production per unit of output is

average total cost

The rational range of production begins at that level of output at which

average variable costs are minimized

A change in the fixed costs of the firm will cause a

change in average total costs at the profit maximizing output level

Which of the following falls outside of the classification of business expenditures that fall into the category of variable costs?

costs of research and development

Which of the following is NOT a characteristic of a production function?

depends on price of the product

Accounting profits and economic profits

differ with regards to expenditures versus values

At product prices between the shut-down point and the break-even point, the profit maximizing, perfectly competitive firm

earns negative profits

If the efficiency of the fixed factor is increasing and the efficiency of the variable is decreasing as additional units of the variable factor are added to the fixed factor, then the

firm is in the rational range of production

A production function

illustrates maximum technical or physical efficiency of the fixed input at the maximum total product

A production function

illustrates variable input proportions

At the initial phase (i.e., at the lowest output levels) of a production function, output

increases at an increasing rate

The total variable cost curve

is a mirror image of the production function

The profit maximizing/loss minimizing firm will cease production when the price of the product

is less than the break-even point

Within the rational range of production,

marginal physical product is always positive

When total physical product is maximized,

marginal physical product is zero

In the rational range of a production function, as use of the variable input increases,

marginal product decreases but is positive

The firm will engage in loss minimizing behavior if the

market price is greater than the shut-down price and less than the break-even price

In economics, a firm that faces no competitors is referred to as ...

monopoly

If the price of the product increases, ceteris paribus, the profit maximizing firm will use ________ of the variable input and produce ________ of output

more, more

The rational range of production begins at the

shut-down point

The "law of diminishing marginal product"

states that output eventually increases at a decreasing rate

At the break-even point

the economic profits of the firm are zero

If marginal revenue is above the minimum average total cost, then

the firm is earning economic profits

At prices above the shut-down price,

the firm will produce

The calculation of economic profit and accounting profit would not differ for

the purchase of fertilizer