ECON Exam #2

question

Capital (K)

answer

services provided by long-lived inputs such as land, buildings (such as factories and stores) and equipment (such as machines and trucks)

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Labor (L)

answer

human services such as those provided by managers, skilled workers, (such as architects, economists, engineers, plumbers) and less-skilled workers (such as custodians, construction laborers, and assembly line workers

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Materials (M)

answer

natural resources and raw goods (oil, water, wheat) and processed products (aluminum, plastic, paper, steel)

question

The production function for a firm that uses only Labor and Capital:

answer

q = F (L,K)

question

short run

answer

a period of time so brief that at least 1 factor of production cannot be varied practically
- at least one input is fixed
- assume that capital is fixed and labor is variable

question

long run

answer

a lengthy enough period of time that all relevant inputs can be varied
- capital and labor are both variables

question

marginal product of labor

answer

change in quantity / change in labor

question

average product of labor

answer

quantity / labor

question

diminishing marginal returns (law of)

answer

if a firm keeps increasing an input, holding all other inputs and tech constant, the corresponding increases in output will eventually become smaller (diminish)

question

isoquant

answer

a curve that shows the efficient combinations of labor and capital that can produce single (iso) level of output (quantity)

question

What do isoquants show?

answer

the smallest amount of inputs that will produce a given amount of output

question

1. Property of isoquants
the farther an isoquant is from the origin...

answer

the greater is the level of output

question

2. Property of isoquants

answer

Isoquants do NOT cross

question

3. Property of Isoquants
Isoquants slope downward

answer

-if an isoquant is sloped upward, the firm could produce the same level of output with a set of relatively few inputs or with more of the same input
-producing with more inputs would be inefficient

question

if inputs are perfect substitutes, each isoquant

answer

is a straight line

question

if isoquants cannot be substitutes, the isoquants

answer

are right angles- zero substitution, kink is less costly!

question

typical isoquants lie between the extreme cases of straight lines and right angles. these isoquants look

answer

curved, the ability to substitute one input for another varies

question

What is the marginal rate of technical substitution?

answer

the slope of an isoquant

question

MRTS =

answer

change in capital (K) / change in labor (L) OR -(MPl) / (MPk)

question

MRTS is always negative or positive?

answer

Negative! because isoquants slope downward

question

the more labor and less capital the firm has, the harder it is to replace remaining capital with labor. Does the isoquant become flatter or steeper?

answer

flatter! (think of a graph with K on vertical and L on horizontal)

question

Cobb-Douglas production function

answer

q = AL^a * K^b
-A, a, and b are all (+) constants
-constants a and b determine the relationships between the marginal and average products of labor and capital

question

a =

answer

MPl / APl

question

b =

answer

MPk / APk

question

constant returns to scale (CRS)

answer

the property of a production function whereby when all inputs are increased by the same proportion, output increases by the same proportion

question

increasing returns to scale (IRS)

answer

the property of a production function whereby output rises more than in proportion to an equal proportional increase in all inputs

question

decreasing returns to scale (DRS)

answer

the property of a production function whereby output rises less than in proportion to an equal proportion increase in all inputs

question

if MPL > APL, then APL is...

answer

rising! think of your grades, if your test grade is above average, your avg goes up and vice versa

question

opportunity cost memorize this

answer

the value of the best alternative use of a resource
- explicit costs are opportunity costs such as wages, rent, and materials

question

2 problems may arise in measuring the cost of a firm's capital

answer

1. how to allocate the initial purchase cost over time
2. what to do if the value of the capital changes over time
- you can avoid these two problems if capital is rented instead of purchased!

question

sunk cost memorize this

answer

a past expenditure that cannot be recovered

question

If the specialized equipment that originally cost $30,000 can be resold for $20,000. What is sunk cost and opportunity cost?

answer

sunk- $10,000
opportunity- $20,000

question

total cost =

answer

variable cost + fixed cost

question

average fixed cost (AFC) =

answer

Fixed cost / quantity

question

Average variable cost (AVC) =

answer

variable cost / quantity OR wL / q

question

average cost (AC) =

answer

C / q = (F/q) + (vc/q) = AFC + AVC

question

marginal cost =

answer

change in cost or change in vc / change in quantity OR w(change in labor / change in quantity)

question

isocost line

answer

all the combinations of inputs that require the same (iso-) total expenditure (cost)

question

explicit costs

answer

out-of-pocket payments for labor, capital, energy, and materials

question

implicit costs

answer

reflect only a foregone opportunity rather than explicit, current expenditure

question

Studying to get a PhD ex) explicit costs

answer

tuition, books, extra living costs

question

Studying to get a PhD ex) implicit costs

answer

time: give up full time job

question

Since sunk costs are past costs that do not differ among the alternatives...

answer

sunk costs are irrelevant costs!

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F (fixed cost) + VC (variable cost) =

answer

Total Cost (C)

question

AFC (F/q) + AVC (VC/q) =

answer

Average Cost
AC = C/q = AFC + AVC

question

Marginal cost =

answer

change in cost / change in quantity OR change in variable cost / change in quantity

question

when does a cost function exhibit economies of scope?

answer

if it is less expensive to produce goods jointly than separately

question

-if SC is zero,
-if SC is positive
-if SC is negative

answer

-there are no economies of scope
-it is cheaper to produce jointly (there are economies of scope)
-cheaper to produce goods separately (diseconomies of scope)

question

learning by doing

answer

refers to the productive skills and knowledge that workers and managers gain from experience

question

what happens when wages fall?

answer

firms use more labor and less capital to produce a given level of output

question

lowest isocost rule

answer

pick the bundle of inputs where the lowest isocost line touches the isoquant- by doing this the firm is minimizing cost

question

tangency rule (MRTS = -w/r)

answer

at the minimum cost bundle, the isoquant is tangent to the isocost line

question

Last-dollar rule

answer

spending one more dollar on labor at x gets the firm as much extra output as spending the same amount on capital

question

Are fixed costs avoidable in the long run?

answer

Yes! They are not sunk costs as they are in the short run.
Ex)the rent a restaurant pays is a FC and this rent can be avoided in the long run if the restaurant does not renew the rental agreement

question

profit =

answer

revenue (p * q) - cost

question

opportunity costs =

answer

explicit costs + implicit costs

question

Future Value =

answer

PV (1 + i)^n

question

how to calculate perpetuity =

answer

(F / (q +i)) + (F / (q +i)^n) + (F / (q +i)^n) + ...

question

Go over example on 7.3 (2 of 4)

answer

over 20 years - memorize this formula

question

Which firms have to pay attention to rival firm's behavior?

answer

Oligopolistic and monopolistically competitive firms

question

example of oligopoly

answer

automobile manufacturers

question

example of monopolistic competition

answer

plumbers in a small town

question

Should a competitive firm ever produce when it is losing money?

answer

Yes, as long as revenue can cover total variable cost + any portion of fixed cost

question

Suppose there is a relatively large number of firms, a high degree of product differentiation, and free entry. What market structure is most likely to form?

answer

A monopolistically competitive market

question

perfect competition is a market structure in which...

answer

buyers and sellers are price takers

question

Characteristics of a Perfect Competitive Market

answer

1. Large number of buyers and sellers
2. Identical Products
3. Full information
4. Negligible transaction costs (firms have some market power)
5. Free entry and exit

question

max profit =

answer

(p * q) - c (q)

question

If R < VC do you shutdown?

answer

Yes!!

question

practice ch 8 long run ex) of perfect comp

answer

figure 8.7

question

in the long run the number of firms is limited because

answer

of government restrictions, resource scarcity, or high entry cost

question

total surplus =

answer

consumer surplus + producer surplus

question

consumer surplus =

answer

marginal WTP - Price

question

producer surplus =

answer

amount received by sellers - cost to sellers

question

we can use producer surplus to study the effects of...

answer

variable cost changes in profits for all the firms in a market

question

what is deadweight loss?

answer

the opportunity cost of giving up some of this good to buy more of another good

1 of 75

question

Capital (K)

answer

services provided by long-lived inputs such as land, buildings (such as factories and stores) and equipment (such as machines and trucks)

question

Labor (L)

answer

question

Materials (M)

answer

natural resources and raw goods (oil, water, wheat) and processed products (aluminum, plastic, paper, steel)

question

The production function for a firm that uses only Labor and Capital:

answer

q = F (L,K)

question

short run

answer

a period of time so brief that at least 1 factor of production cannot be varied practically
- at least one input is fixed
- assume that capital is fixed and labor is variable

question

long run

answer

a lengthy enough period of time that all relevant inputs can be varied
- capital and labor are both variables

question

marginal product of labor

answer

change in quantity / change in labor

question

average product of labor

answer

quantity / labor

question

diminishing marginal returns (law of)

answer

if a firm keeps increasing an input, holding all other inputs and tech constant, the corresponding increases in output will eventually become smaller (diminish)

question

isoquant

answer

a curve that shows the efficient combinations of labor and capital that can produce single (iso) level of output (quantity)

question

What do isoquants show?

answer

the smallest amount of inputs that will produce a given amount of output

question

1. Property of isoquants
the farther an isoquant is from the origin...

answer

the greater is the level of output

question

2. Property of isoquants

answer

Isoquants do NOT cross

question

3. Property of Isoquants
Isoquants slope downward

answer

-if an isoquant is sloped upward, the firm could produce the same level of output with a set of relatively few inputs or with more of the same input
-producing with more inputs would be inefficient

question

if inputs are perfect substitutes, each isoquant

answer

is a straight line

question

if isoquants cannot be substitutes, the isoquants

answer

are right angles- zero substitution, kink is less costly!

question

typical isoquants lie between the extreme cases of straight lines and right angles. these isoquants look

answer

curved, the ability to substitute one input for another varies

question

What is the marginal rate of technical substitution?

answer

the slope of an isoquant

question

MRTS =

answer

change in capital (K) / change in labor (L) OR -(MPl) / (MPk)

question

MRTS is always negative or positive?

answer

Negative! because isoquants slope downward

question

the more labor and less capital the firm has, the harder it is to replace remaining capital with labor. Does the isoquant become flatter or steeper?

answer

flatter! (think of a graph with K on vertical and L on horizontal)

question

Cobb-Douglas production function

answer

q = AL^a * K^b
-A, a, and b are all (+) constants
-constants a and b determine the relationships between the marginal and average products of labor and capital

question

a =

answer

MPl / APl

question

b =

answer

MPk / APk

question

constant returns to scale (CRS)

answer

the property of a production function whereby when all inputs are increased by the same proportion, output increases by the same proportion

question

increasing returns to scale (IRS)

answer

the property of a production function whereby output rises more than in proportion to an equal proportional increase in all inputs

question

decreasing returns to scale (DRS)

answer

the property of a production function whereby output rises less than in proportion to an equal proportion increase in all inputs

question

if MPL > APL, then APL is...

answer

rising! think of your grades, if your test grade is above average, your avg goes up and vice versa

question

opportunity cost memorize this

answer

the value of the best alternative use of a resource
- explicit costs are opportunity costs such as wages, rent, and materials

question

2 problems may arise in measuring the cost of a firm's capital

answer

1. how to allocate the initial purchase cost over time
2. what to do if the value of the capital changes over time
- you can avoid these two problems if capital is rented instead of purchased!

question

sunk cost memorize this

answer

a past expenditure that cannot be recovered

question

If the specialized equipment that originally cost $30,000 can be resold for $20,000. What is sunk cost and opportunity cost?

answer

sunk- $10,000
opportunity- $20,000

question

total cost =

answer

variable cost + fixed cost

question

average fixed cost (AFC) =

answer

Fixed cost / quantity

question

Average variable cost (AVC) =

answer

variable cost / quantity OR wL / q

question

average cost (AC) =

answer

C / q = (F/q) + (vc/q) = AFC + AVC

question

marginal cost =

answer

change in cost or change in vc / change in quantity OR w(change in labor / change in quantity)

question

isocost line

answer

all the combinations of inputs that require the same (iso-) total expenditure (cost)

question

explicit costs

answer

out-of-pocket payments for labor, capital, energy, and materials

question

implicit costs

answer

reflect only a foregone opportunity rather than explicit, current expenditure

question

Studying to get a PhD ex) explicit costs

answer

tuition, books, extra living costs

question

Studying to get a PhD ex) implicit costs

answer

time: give up full time job

question

Since sunk costs are past costs that do not differ among the alternatives...

answer

sunk costs are irrelevant costs!

question

F (fixed cost) + VC (variable cost) =

answer

Total Cost (C)

question

AFC (F/q) + AVC (VC/q) =

answer

Average Cost
AC = C/q = AFC + AVC

question

Marginal cost =

answer

change in cost / change in quantity OR change in variable cost / change in quantity

question

when does a cost function exhibit economies of scope?

answer

if it is less expensive to produce goods jointly than separately

question

-if SC is zero,
-if SC is positive
-if SC is negative

answer

-there are no economies of scope
-it is cheaper to produce jointly (there are economies of scope)
-cheaper to produce goods separately (diseconomies of scope)

question

learning by doing

answer

refers to the productive skills and knowledge that workers and managers gain from experience

question

what happens when wages fall?

answer

firms use more labor and less capital to produce a given level of output

question

lowest isocost rule

answer

pick the bundle of inputs where the lowest isocost line touches the isoquant- by doing this the firm is minimizing cost

question

tangency rule (MRTS = -w/r)

answer

at the minimum cost bundle, the isoquant is tangent to the isocost line

question

Last-dollar rule

answer

spending one more dollar on labor at x gets the firm as much extra output as spending the same amount on capital

question

Are fixed costs avoidable in the long run?

answer

Yes! They are not sunk costs as they are in the short run.
Ex)the rent a restaurant pays is a FC and this rent can be avoided in the long run if the restaurant does not renew the rental agreement

question

profit =

answer

revenue (p * q) - cost

question

opportunity costs =

answer

explicit costs + implicit costs

question

Future Value =

answer

PV (1 + i)^n

question

how to calculate perpetuity =

answer

(F / (q +i)) + (F / (q +i)^n) + (F / (q +i)^n) + ...

question

Go over example on 7.3 (2 of 4)

answer

over 20 years - memorize this formula

question

Which firms have to pay attention to rival firm's behavior?

answer

Oligopolistic and monopolistically competitive firms

question

example of oligopoly

answer

automobile manufacturers

question

example of monopolistic competition

answer

plumbers in a small town

question

Should a competitive firm ever produce when it is losing money?

answer

Yes, as long as revenue can cover total variable cost + any portion of fixed cost

question

Suppose there is a relatively large number of firms, a high degree of product differentiation, and free entry. What market structure is most likely to form?

answer

A monopolistically competitive market

question

perfect competition is a market structure in which...

answer

buyers and sellers are price takers

question

Characteristics of a Perfect Competitive Market

answer

1. Large number of buyers and sellers
2. Identical Products
3. Full information
4. Negligible transaction costs (firms have some market power)
5. Free entry and exit

question

max profit =

answer

(p * q) - c (q)

question

If R < VC do you shutdown?

answer

Yes!!

question

practice ch 8 long run ex) of perfect comp

answer

figure 8.7

question

in the long run the number of firms is limited because

answer

of government restrictions, resource scarcity, or high entry cost

question

total surplus =

answer

consumer surplus + producer surplus

question

consumer surplus =

answer

marginal WTP - Price

question

producer surplus =

answer

amount received by sellers - cost to sellers

question

we can use producer surplus to study the effects of...

answer

variable cost changes in profits for all the firms in a market

question

what is deadweight loss?

answer

the opportunity cost of giving up some of this good to buy more of another good

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ECON Exam #2

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