chapter 8 – producers in the long run

question

technical efficiency

answer

given # of inputs are combined in such a way as to maximize the level of output
- firms should use lowest cost combo of labour and capital

question

cost minimization

answer

firms choose to produce at lowest possible price
MPk=MPl

question

principle of substitution

answer

methods of production change when relative prices of factors change

question

long run cost curve

answer

lowest possible cost of producing each level of output when all inputs can be varied

question

economies of scale

answer

reduction of long run average cost resulting from an expansion in the scale of a firms operations so that more of all inputs are being used

question

increasing returns

answer

output increases more than in proportion to inputs as production increases

question

minimum efficient scale

answer

smallest output at which LRAC reaches its minimum

question

constant returns

answer

output increases in proportion to inputs as production is increased

question

decreasing returns

answer

output increases less than in proportion to inputs as production increases
- implies diseconomies of scale

question

where is each SRATC tangent to the LRAC curve?

answer

at the level of output for which the quantity of the fixed factor is optimal and lies above it for all other levels of output

question

technological change

answer

any change in the available techniques of production

question

3 aspects of technological change

answer

1. new techniques
2. improved inputs
3. new products

question

isoquant

answer

describes a firms alternative methods for producing a given level of output

question

marginal rate of substitution

answer

measures the rate at which one factor is substituted for another with output being held constant

question

isocost line

answer

alternate combos of factors a firm can buy for a given total cost
- slope reflects relative factor prices

question

what is the tangency point between the isocost line and the isoquant?

answer

the least cost position

1 of 16

question

technical efficiency

answer

given # of inputs are combined in such a way as to maximize the level of output
- firms should use lowest cost combo of labour and capital

question

cost minimization

answer

firms choose to produce at lowest possible price
MPk=MPl

question

principle of substitution

answer

methods of production change when relative prices of factors change

question

long run cost curve

answer

lowest possible cost of producing each level of output when all inputs can be varied

question

economies of scale

answer

reduction of long run average cost resulting from an expansion in the scale of a firms operations so that more of all inputs are being used

question

increasing returns

answer

output increases more than in proportion to inputs as production increases

question

minimum efficient scale

answer

smallest output at which LRAC reaches its minimum

question

constant returns

answer

output increases in proportion to inputs as production is increased

question

decreasing returns

answer

output increases less than in proportion to inputs as production increases
- implies diseconomies of scale

question

where is each SRATC tangent to the LRAC curve?

answer

at the level of output for which the quantity of the fixed factor is optimal and lies above it for all other levels of output

question

technological change

answer

any change in the available techniques of production

question

3 aspects of technological change

answer

1. new techniques
2. improved inputs
3. new products

question

isoquant

answer

describes a firms alternative methods for producing a given level of output

question

marginal rate of substitution

answer

measures the rate at which one factor is substituted for another with output being held constant

question

isocost line

answer

alternate combos of factors a firm can buy for a given total cost
- slope reflects relative factor prices

question

what is the tangency point between the isocost line and the isoquant?

answer

the least cost position

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chapter 8 – producers in the long run

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