Econ 300 Exam 2 - Custom Scholars
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Econ 300 Exam 2

question
Assumptions about Firms' Production Behavior
answer
1. The firm produces a single good
2. The firm has already chosen which product to produce
3. The firm's goal is to minimize the cost of producing it
4. The firm uses only capital and labor to make its product
5. In the short run, a firm can only choose labor; In the long run, the firm can freely choose both labor and capital it employs
6. The more inputs the firm uses, the more output it makes
7. Diminishing marginal returns to labor and capital
8. The firm can buy as many capital or labor inputs as it wants at fixed market prices
9. If there is a well functioning capital market, the firm does not have a budget constraint
question
Short Run
answer
The period of time during which one or more inputs into production cannot be changed (firms can only alter labor)
question
Fixed Inputs
answer
Inputs that cannot be changed in the short run
question
Variable Inputs
answer
Inputs that can be changed in the short run
question
Long Run
answer
The amount of time necessary for all inputs into production to be fully adjustable (firms can alter both labor and capital)
question
Production Function
answer
a mathematical relationship that describes how much output can be made from different combos of inputs
question
Cobb-Douglas production function
answer
Q = KaLb
question
Marginal Product
answer
The additional output that a firm can produce by using an additional unit of an input
question
Average Product
answer
APl = Q/L
question
Diminishing Marginal Product
answer
The reduction in the incremental output obtained from adding more and more labor
question
Cost minimization
answer
A firms goal of producing a specific quantity of output at minimum cost
question
Isoquants
answer
The curves representing all combos of inputs that allow a firm to make a particular quantity of output
question
Marginal Rate of Technical Substitution (MRTSxy)
answer
The rate at which the firm can trade input X for input Y, holding output constant
question
Negative Slope of the Isoquant
answer
The marginal rate of technical substitution of labor L for capital K
question
Perfect Substitute in Production
answer
Straight Line
question
Perfect Complement in Production
answer
L shaped
question
What happens as labor becomes more expensive
answer
The isoquant line becomes steeper
question
What happens as you move farther from the origin
answer
The isoquant lines represent higher total expenditure
question
Constant Returns to Scale
answer
A production function for which changing the amount of capital and labor by some multiple changes the quantity of output by exactly the same multiple
question
Increasing Returns to Scale
answer
A production function for which changing all inputs by the same proportion changes output more than proportionately
question
Decreasing Returns to Scale
answer
A production function for which adjusting all inputs by the same multiple changes output by less than that multiple
question
Total Factor productivity growth (technological change)
answer
An improvement in technology that changes the firms production function such that it gets more output from the same amount of inputs
question
Economic Cost
answer
The sum of a producers accounting and opportunity costs
question
Accounting Cost
answer
The direct costs of operating a business, including costs for raw materials, wages paid to workers, rent paid for office or retail space, and the like
question
Opportunity Cost
answer
The value of what a producer gives up by using an input
question
Economic Profit
answer
A firms total revenue minus its economic cost
question
Accounting Profit
answer
A firms total revenue minus its accounting cost
question
Fixed Cost
answer
An input cost that does not vary with amount of output
question
Sunk Cost
answer
A cost that, once paid, cannot be reversed
question
Variable Cost
answer
The cost of inputs that change as the firm changes its quantity of output
question
The Demand Curve in a perfectly competitive market
answer
Perfectly elastic at the market equilibrium price
question
Profit
answer
The difference between a firms revenue and its total cost
question
Marginal Revenue
answer
The additional revenue from selling one additional unit of output (change in TR/ Change in Q)
question
In a perfectly competitive market marginal revenue at market price
answer
MR=P
question
Profit maximizing level
answer
MR=MC
question
Operate or Shut down (short run)
answer
Operate if TR >= VC
Shut down if TR < VC
question
Producer Surplus
answer
TR-VC
question
Long-run competitive equilibrium
answer
The point at which the market price is equal to the minimum average total cost and the firms would gain no profits
question
Adjustments between Long run equilibrium (Demand Increase)
answer
Price increases first and then back down while the new equilibrium quantity rises
question
Adjustments between Long run equilibrium (Cost decrease)
answer
quantity increases and prices decrease throughout the transition from the high-cost to the low-cist long run equilibrium
question
Market Power
answer
The ability to influence the market price of its products
question
Barriers to entry
answer
Factors that keep entrants out of a market despite the existence of a large producer surplus
question
Natural Monopoly
answer
A market in which it is efficient for a single firm to produce the entire industry output
question
Switching Costs
answer
customers must give something up to switch to a competing product, this will tend to generate market power for the incumbent and make entry difficult
question
Network Good
answer
A good whose value to each consumer increases with the number of other consumers of the product
question
Oligopoly
answer
Market Structure characterized by competition among a small number of firms
question
Monopolistic Competition
answer
A type of imperfect competition where a large number of firms have some market power, but each makes zero economic profit in the long run
question
Marginal Revenue Equation
answer
MR = P + (Change P/Change Q) * Q
1 of 48
question
Assumptions about Firms' Production Behavior
answer
1. The firm produces a single good
2. The firm has already chosen which product to produce
3. The firm's goal is to minimize the cost of producing it
4. The firm uses only capital and labor to make its product
5. In the short run, a firm can only choose labor; In the long run, the firm can freely choose both labor and capital it employs
6. The more inputs the firm uses, the more output it makes
7. Diminishing marginal returns to labor and capital
8. The firm can buy as many capital or labor inputs as it wants at fixed market prices
9. If there is a well functioning capital market, the firm does not have a budget constraint
question
Short Run
answer
The period of time during which one or more inputs into production cannot be changed (firms can only alter labor)
question
Fixed Inputs
answer
Inputs that cannot be changed in the short run
question
Variable Inputs
answer
Inputs that can be changed in the short run
question
Long Run
answer
The amount of time necessary for all inputs into production to be fully adjustable (firms can alter both labor and capital)
question
Production Function
answer
a mathematical relationship that describes how much output can be made from different combos of inputs
question
Cobb-Douglas production function
answer
Q = KaLb
question
Marginal Product
answer
The additional output that a firm can produce by using an additional unit of an input
question
Average Product
answer
APl = Q/L
question
Diminishing Marginal Product
answer
The reduction in the incremental output obtained from adding more and more labor
question
Cost minimization
answer
A firms goal of producing a specific quantity of output at minimum cost
question
Isoquants
answer
The curves representing all combos of inputs that allow a firm to make a particular quantity of output
question
Marginal Rate of Technical Substitution (MRTSxy)
answer
The rate at which the firm can trade input X for input Y, holding output constant
question
Negative Slope of the Isoquant
answer
The marginal rate of technical substitution of labor L for capital K
question
Perfect Substitute in Production
answer
Straight Line
question
Perfect Complement in Production
answer
L shaped
question
What happens as labor becomes more expensive
answer
The isoquant line becomes steeper
question
What happens as you move farther from the origin
answer
The isoquant lines represent higher total expenditure
question
Constant Returns to Scale
answer
A production function for which changing the amount of capital and labor by some multiple changes the quantity of output by exactly the same multiple
question
Increasing Returns to Scale
answer
A production function for which changing all inputs by the same proportion changes output more than proportionately
question
Decreasing Returns to Scale
answer
A production function for which adjusting all inputs by the same multiple changes output by less than that multiple
question
Total Factor productivity growth (technological change)
answer
An improvement in technology that changes the firms production function such that it gets more output from the same amount of inputs
question
Economic Cost
answer
The sum of a producers accounting and opportunity costs
question
Accounting Cost
answer
The direct costs of operating a business, including costs for raw materials, wages paid to workers, rent paid for office or retail space, and the like
question
Opportunity Cost
answer
The value of what a producer gives up by using an input
question
Economic Profit
answer
A firms total revenue minus its economic cost
question
Accounting Profit
answer
A firms total revenue minus its accounting cost
question
Fixed Cost
answer
An input cost that does not vary with amount of output
question
Sunk Cost
answer
A cost that, once paid, cannot be reversed
question
Variable Cost
answer
The cost of inputs that change as the firm changes its quantity of output
question
The Demand Curve in a perfectly competitive market
answer
Perfectly elastic at the market equilibrium price
question
Profit
answer
The difference between a firms revenue and its total cost
question
Marginal Revenue
answer
The additional revenue from selling one additional unit of output (change in TR/ Change in Q)
question
In a perfectly competitive market marginal revenue at market price
answer
MR=P
question
Profit maximizing level
answer
MR=MC
question
Operate or Shut down (short run)
answer
Operate if TR >= VC
Shut down if TR < VC
question
Producer Surplus
answer
TR-VC
question
Long-run competitive equilibrium
answer
The point at which the market price is equal to the minimum average total cost and the firms would gain no profits
question
Adjustments between Long run equilibrium (Demand Increase)
answer
Price increases first and then back down while the new equilibrium quantity rises
question
Adjustments between Long run equilibrium (Cost decrease)
answer
quantity increases and prices decrease throughout the transition from the high-cost to the low-cist long run equilibrium
question
Market Power
answer
The ability to influence the market price of its products
question
Barriers to entry
answer
Factors that keep entrants out of a market despite the existence of a large producer surplus
question
Natural Monopoly
answer
A market in which it is efficient for a single firm to produce the entire industry output
question
Switching Costs
answer
customers must give something up to switch to a competing product, this will tend to generate market power for the incumbent and make entry difficult
question
Network Good
answer
A good whose value to each consumer increases with the number of other consumers of the product
question
Oligopoly
answer
Market Structure characterized by competition among a small number of firms
question
Monopolistic Competition
answer
A type of imperfect competition where a large number of firms have some market power, but each makes zero economic profit in the long run
question
Marginal Revenue Equation
answer
MR = P + (Change P/Change Q) * Q

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