EconExam2

# EconExam2 - A firm's cost minimizing production decisions...

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A firm's cost minimizing production decisions are made by: understanding the firm's input-output function (production technology) and the input prices the firms faces, and then deciding how much of each input to use for a given level of output. The firm needs to understand its input-output function before it can choose the cost minimizing production methods. The factors of production: Are inputs the firm must use in the production process, and include labor, materials and capital. Factors of production are inputs. The firm's production function, Both 1 and 3. The short run describes a period of time that lasts: Period of time over which one or more factors of production cannot be changed. The short run varies and is determined by the firm's having one or more inputs fixed and the time period over which those inputs are fixed. A short run production function: Focuses on the additional output resulting from increasing the amount of inputs, holding at least one input constant. Often capital is held constant and labor is allowed to vary when studying short run production functions. If two laborers each produce an average of 300 units, and when a third laborer is hired output increases to 810 units, Both 2 and 3. Average product is 270, which is lower than the 300 average product produced with two laborers. The average product of labor is maximized when the marginal product of labor: equals the average product of labor. In the typical production function in the economy, the marginal product of labor first rises and then falls because: All of the above. Diminishing marginal returns occurs because: as more laborers are hired, workers increasingly share use of other fixed inputs, and so their ability to be increasingly productive is limited. Diminishing returns refers to a scenario where output is still increasing as more of an input is hired, but the size of the increase is falling. The production isoquant measures: all possible combinations of two inputs that yield the same level of output. The possible combinations of two inputs needed to produce a given level of output are illustrated along the isoquant. If capital is represented on the vertical axis and labor on the horizontal axis, the marginal rate of substitution (MRTS) is equal to: minus one times the slope of the isoquant, or the marginal product of labor divided by the marginal product of capital (MP L /MP K ). minus one times the slope of the isoquant, or (∆L/∆K), which is equal to (MP L /MP K). A movement along the isoquant curve is represented by the equation: (MP K )∆K + (MP L )∆L = 0. If capital is represented on the vertical axis and labor on the horizontal axis, the marginal rate of substitution (MRTS) falls in value: All of the above. If the marginal rate of technical substitution MRTS is equal to 4, then:

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## This note was uploaded on 07/27/2009 for the course ECN 302 taught by Professor Brady during the Spring '09 term at Cleveland State.

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EconExam2 - A firm's cost minimizing production decisions...

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