ECON Exam #2 - Custom Scholars
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# ECON Exam #2

question
Capital (K)
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)
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
question
Materials (M)
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:
q = F (L,K)
question
short run
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
a lengthy enough period of time that all relevant inputs can be varied
- capital and labor are both variables
question
marginal product of labor
change in quantity / change in labor
question
average product of labor
quantity / labor
question
diminishing marginal returns (law of)
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
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?
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...
the greater is the level of output
question
2. Property of isoquants
Isoquants do NOT cross
question
3. Property of Isoquants
Isoquants slope downward
-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
is a straight line
question
if isoquants cannot be substitutes, the isoquants
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
curved, the ability to substitute one input for another varies
question
What is the marginal rate of technical substitution?
the slope of an isoquant
question
MRTS =
change in capital (K) / change in labor (L) OR -(MPl) / (MPk)
question
MRTS is always negative or positive?
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?
flatter! (think of a graph with K on vertical and L on horizontal)
question
Cobb-Douglas production function
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 =
MPl / APl
question
b =
MPk / APk
question
constant returns to scale (CRS)
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)
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)
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...
question
opportunity cost memorize this
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
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
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?
sunk- \$10,000
opportunity- \$20,000
question
total cost =
variable cost + fixed cost
question
average fixed cost (AFC) =
Fixed cost / quantity
question
Average variable cost (AVC) =
variable cost / quantity OR wL / q
question
average cost (AC) =
C / q = (F/q) + (vc/q) = AFC + AVC
question
marginal cost =
change in cost or change in vc / change in quantity OR w(change in labor / change in quantity)
question
isocost line
all the combinations of inputs that require the same (iso-) total expenditure (cost)
question
explicit costs
out-of-pocket payments for labor, capital, energy, and materials
question
implicit costs
reflect only a foregone opportunity rather than explicit, current expenditure
question
Studying to get a PhD ex) explicit costs
tuition, books, extra living costs
question
Studying to get a PhD ex) implicit costs
time: give up full time job
question
Since sunk costs are past costs that do not differ among the alternatives...
sunk costs are irrelevant costs!
question
F (fixed cost) + VC (variable cost) =
Total Cost (C)
question
AFC (F/q) + AVC (VC/q) =
Average Cost
AC = C/q = AFC + AVC
question
Marginal cost =
change in cost / change in quantity OR change in variable cost / change in quantity
question
when does a cost function exhibit economies of scope?
if it is less expensive to produce goods jointly than separately
question
-if SC is zero,
-if SC is positive
-if SC is negative
-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
refers to the productive skills and knowledge that workers and managers gain from experience
question
what happens when wages fall?
firms use more labor and less capital to produce a given level of output
question
lowest isocost rule
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)
at the minimum cost bundle, the isoquant is tangent to the isocost line
question
Last-dollar rule
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?
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 =
revenue (p * q) - cost
question
opportunity costs =
explicit costs + implicit costs
question
Future Value =
PV (1 + i)^n
question
how to calculate perpetuity =
(F / (q +i)) + (F / (q +i)^n) + (F / (q +i)^n) + ...
question
Go over example on 7.3 (2 of 4)
over 20 years - memorize this formula
question
Which firms have to pay attention to rival firm's behavior?
Oligopolistic and monopolistically competitive firms
question
example of oligopoly
automobile manufacturers
question
example of monopolistic competition
plumbers in a small town
question
Should a competitive firm ever produce when it is losing money?
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?
A monopolistically competitive market
question
perfect competition is a market structure in which...
buyers and sellers are price takers
question
Characteristics of a Perfect Competitive Market
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 =
(p * q) - c (q)
question
If R < VC do you shutdown?
Yes!!
question
practice ch 8 long run ex) of perfect comp
figure 8.7
question
in the long run the number of firms is limited because
of government restrictions, resource scarcity, or high entry cost
question
total surplus =
consumer surplus + producer surplus
question
consumer surplus =
marginal WTP - Price
question
producer surplus =
amount received by sellers - cost to sellers
question
we can use producer surplus to study the effects of...
variable cost changes in profits for all the firms in a market
question
the opportunity cost of giving up some of this good to buy more of another good
1 of 75
question
Capital (K)
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)
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
question
Materials (M)
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:
q = F (L,K)
question
short run
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
a lengthy enough period of time that all relevant inputs can be varied
- capital and labor are both variables
question
marginal product of labor
change in quantity / change in labor
question
average product of labor
quantity / labor
question
diminishing marginal returns (law of)
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
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?
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...
the greater is the level of output
question
2. Property of isoquants
Isoquants do NOT cross
question
3. Property of Isoquants
Isoquants slope downward
-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
is a straight line
question
if isoquants cannot be substitutes, the isoquants
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
curved, the ability to substitute one input for another varies
question
What is the marginal rate of technical substitution?
the slope of an isoquant
question
MRTS =
change in capital (K) / change in labor (L) OR -(MPl) / (MPk)
question
MRTS is always negative or positive?
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?
flatter! (think of a graph with K on vertical and L on horizontal)
question
Cobb-Douglas production function
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 =
MPl / APl
question
b =
MPk / APk
question
constant returns to scale (CRS)
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)
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)
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...
question
opportunity cost memorize this
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
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
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?
sunk- \$10,000
opportunity- \$20,000
question
total cost =
variable cost + fixed cost
question
average fixed cost (AFC) =
Fixed cost / quantity
question
Average variable cost (AVC) =
variable cost / quantity OR wL / q
question
average cost (AC) =
C / q = (F/q) + (vc/q) = AFC + AVC
question
marginal cost =
change in cost or change in vc / change in quantity OR w(change in labor / change in quantity)
question
isocost line
all the combinations of inputs that require the same (iso-) total expenditure (cost)
question
explicit costs
out-of-pocket payments for labor, capital, energy, and materials
question
implicit costs
reflect only a foregone opportunity rather than explicit, current expenditure
question
Studying to get a PhD ex) explicit costs
tuition, books, extra living costs
question
Studying to get a PhD ex) implicit costs
time: give up full time job
question
Since sunk costs are past costs that do not differ among the alternatives...
sunk costs are irrelevant costs!
question
F (fixed cost) + VC (variable cost) =
Total Cost (C)
question
AFC (F/q) + AVC (VC/q) =
Average Cost
AC = C/q = AFC + AVC
question
Marginal cost =
change in cost / change in quantity OR change in variable cost / change in quantity
question
when does a cost function exhibit economies of scope?
if it is less expensive to produce goods jointly than separately
question
-if SC is zero,
-if SC is positive
-if SC is negative
-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
refers to the productive skills and knowledge that workers and managers gain from experience
question
what happens when wages fall?
firms use more labor and less capital to produce a given level of output
question
lowest isocost rule
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)
at the minimum cost bundle, the isoquant is tangent to the isocost line
question
Last-dollar rule
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?
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 =
revenue (p * q) - cost
question
opportunity costs =
explicit costs + implicit costs
question
Future Value =
PV (1 + i)^n
question
how to calculate perpetuity =
(F / (q +i)) + (F / (q +i)^n) + (F / (q +i)^n) + ...
question
Go over example on 7.3 (2 of 4)
over 20 years - memorize this formula
question
Which firms have to pay attention to rival firm's behavior?
Oligopolistic and monopolistically competitive firms
question
example of oligopoly
automobile manufacturers
question
example of monopolistic competition
plumbers in a small town
question
Should a competitive firm ever produce when it is losing money?
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?
A monopolistically competitive market
question
perfect competition is a market structure in which...
buyers and sellers are price takers
question
Characteristics of a Perfect Competitive Market
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 =
(p * q) - c (q)
question
If R < VC do you shutdown?
Yes!!
question
practice ch 8 long run ex) of perfect comp
figure 8.7
question
in the long run the number of firms is limited because
of government restrictions, resource scarcity, or high entry cost
question
total surplus =
consumer surplus + producer surplus
question
consumer surplus =
marginal WTP - Price
question
producer surplus =
amount received by sellers - cost to sellers
question
we can use producer surplus to study the effects of...
variable cost changes in profits for all the firms in a market
question
the opportunity cost of giving up some of this good to buy more of another good

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