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)

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Fixed Inputs

answer

Inputs that cannot be changed in the short run

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Variable Inputs

answer

Inputs that can be changed in the short run

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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

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Cobb-Douglas production function

answer

Q = KaLb

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Marginal Product

answer

The additional output that a firm can produce by using an additional unit of an input

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Average Product

answer

APl = Q/L

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Diminishing Marginal Product

answer

The reduction in the incremental output obtained from adding more and more labor

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Cost minimization

answer

A firms goal of producing a specific quantity of output at minimum cost

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Isoquants

answer

The curves representing all combos of inputs that allow a firm to make a particular quantity of output

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Marginal Rate of Technical Substitution (MRTSxy)

answer

The rate at which the firm can trade input X for input Y, holding output constant

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Negative Slope of the Isoquant

answer

The marginal rate of technical substitution of labor L for capital K

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Perfect Substitute in Production

answer

Straight Line

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Perfect Complement in Production

answer

L shaped

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What happens as labor becomes more expensive

answer

The isoquant line becomes steeper

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What happens as you move farther from the origin

answer

The isoquant lines represent higher total expenditure

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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

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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

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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

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Accounting Profit

answer

A firms total revenue minus its accounting cost

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Fixed Cost

answer

An input cost that does not vary with amount of output

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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

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Perfectly elastic at the market equilibrium price

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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

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Profit maximizing level

answer

MR=MC

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Operate or Shut down (short run)

answer

Operate if TR >= VC
Shut down if TR < VC

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Producer Surplus

answer

TR-VC

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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

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Market Power

answer

The ability to influence the market price of its products

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Barriers to entry

answer

Factors that keep entrants out of a market despite the existence of a large producer surplus

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Natural Monopoly

answer

A market in which it is efficient for a single firm to produce the entire industry output

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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

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Network Good

answer

A good whose value to each consumer increases with the number of other consumers of the product

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Oligopoly

answer

Market Structure characterized by competition among a small number of firms

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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

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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Econ 300 Exam 2

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