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econ study guide

# econ study guide - 1 2 3 4 5 6 7 8 9 Ch V What is the...

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Ch. V 1. What is the cost-minimizing level of output? a. Given a desired level of o/p, isoquants and isocosts provide information to determine o/p level. 2. Cost min level of inputs/ a. Determined by point at which ratio of input prices equals the ratio of marginal products for the various inputs. 3. 3 most important measures of productivity: a. Total Product: i. The MAX level of o/p that can be produced w/ a given amount of inputs. b. Average Product i. Measure of o/p produced per unit of Input. APl=Q/L c. Marginal Product i. The change in total o/p attributable to the last unit of an input. MPk=^Q/^K 4. Increasing Marginal Returns: a. The range of input usage over which marginal product increases. 5. Phases of Marginal Returns: a. As the usage of an input increases, marginal product initially increases (increasing marginal returns), then begins to decline (decreasing marg. Returns), and eventually becomes negative (negative marg. returns). 6. Manager’s role in guiding production: a. Ensure firm operates at right point on Production Function. i. Workers have to work at Full Potential. 1. Manager uses Incentives to induce them to put forth maximal Effort. b. Ensure firm uses correct level of Inputs. i. E.g. hire correct number of employees. 7. Value Marginal Product: a. Value of the o/p produced by the last unit of an input. VMPl= P X MPl b. Hire as long as VMPl > Cost of hiring. 8. Profit Maximizing Input Usage: a. To MAX profits, a manager should use inputs at levels at which the marginal benefit = marginal cost. b. When the cost of each additional unit of labor is “w” the manager should continue to employ labor up to the point where VMPL= w in the range of diminishing marginal product. i. When given a wage rate, follow the line until it reaches the downward sloping portion of the VMPL/ Demand for labor curve. This will yield the MAX PROFIT point. 9. Linear Production Function: a. Production function that assumes a perfect linear relationship between all inputs and total output b. Q= F(K,L) = aK + bL

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c. a & b are constants. d. Inputs are perfect substitutes. 10. Leontief Prod. Funct. a. Production function that assumes inputs are used in fixed proportions. 11. Cobb-Douglas Production Function: a. Production function that assumes some degree of substitutability among inputs. b. Q = F(K,L) = K^aL^b c. Relationship between functions is not linear. d. Inputs need not be used in fixed proportions. e. Some degree of substitutability, though imperfect. 12. Marginal Product for a Cobb-Douglas Production Function: a. Q = F(K,L) = K ^a L ^b b. MPL= b K^ a L^ b-1 c. MPK= a K ^a-1 L b 13. Profit MAX Point of an Input: a. Point where Value Marginal Product of an Input = Price of Input b. EXAMPLE: i. K is fixed at 1 unit in SR. ii.
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econ study guide - 1 2 3 4 5 6 7 8 9 Ch V What is the...

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