Questions for review 2

Questions for - Ques%ons for review II Ch 6& Ch 7 Ques%ons for review •  What is a produc.on func.on? How does a long

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Unformatted text preview: Ques%ons for review II Ch 6 & Ch 7 Ques%ons for review •  What is a produc.on func.on? How does a long ­run produc.on func.on differ from a short ­run produc.on func.on? •  A produc%on func%on represents how inputs are transformed into outputs by a firm. •  In par%cular, a produc%on func%on describes the maximum output that a firm can produce for each specified combina%on of inputs. •  In the short run, one or more factors of produc%on cannot be changed, so a short ­run produc%on func%on tells us the maximum output that can be produced with different amounts of the variable inputs, holding fixed inputs constant. In the long ­run produc%on func%on, all inputs are variable. Ques%ons for review •  Why is the marginal product of labor likely to increase ini.ally in the short run as more of the variable input is hired? •  •  The marginal product of labor is likely to increase ini%ally because when there are more workers, each is able to specialize on an aspect of the produc%on process in which he or she is par%cularly skilled. For example, think of the typical fast food restaurant. If there is only one worker, he will need to prepare the burgers, fries, and sodas, as well as take the orders. Only so many customers can be served in an hour. With two or three workers, each is able to specialize, and the marginal product (number of customers served per hour) is likely to increase as we move from one to two to three workers. Eventually, there will be enough workers and there will be no more gains from specializa%on. At this point, the marginal product will begin to diminish. Ques%ons for review •  What is the difference between a produc.on func.on and an isoquant? •  A produc%on func%on describes the maximum output that can be achieved with any given combina%on of inputs. An isoquant iden%fies all of the different combina%ons of inputs that can be used to produce one par%cular level of output. Ques%ons for review •  Isoquants can be convex, linear, or L ­shaped. What does each of these shapes tell you about the nature of the produc.on func.on? What does each of these shapes tell you about the MRTS? •  •  Convex isoquants indicate that some units of one input can be subs%tuted for a unit of the other input while maintaining output at the same level. In this case, the MRTS is diminishing as we move down along the isoquant. This tells us that it becomes more and more difficult to subs%tute one input for the other while keeping output unchanged. Linear isoquants imply that the slope, or the MRTS, is constant. This means that the same number of units of one input can always be exchanged for a unit of the other input holding output constant. The inputs are perfect subs%tutes in this case. Ques%ons for review •  L ­shaped isoquants imply that the inputs are perfect complements, and the firm is producing under a fixed propor%ons type of technology. In this case the firm cannot give up one input in exchange for the other and s%ll maintain the same level of output. For example, the firm may require exactly 4 units of capital for each unit of labor, in which case one input cannot be subs%tuted for the other. •  Can an isoquant ever slope upward? •  No. An upward sloping isoquant would mean that if you increased both inputs output would stay the same. This would occur only if one of the inputs reduced output; sort of like a bad in consumer theory. As a general rule, if the firm has more of all inputs it can produce more output Ques%ons for review •  Explain the term “marginal rate of technical subs.tu.on.” What does a MRTS = 4 mean? •  MRTS is the amount by which the quan%ty of one input can be reduced when the other input is increased by one unit, while maintaining the same level of output. If the MRTS is 4 then one input can be reduced by 4 units as the other is increased by one unit, and output will remain the same. •  Explain why the marginal rate of technical subs.tu.on is likely to diminish as more and more labor is subs.tuted for capital. •  As more and more labor is subs%tuted for capital, it becomes increasingly difficult for labor to perform the jobs previously done by capital. Therefore, more units of labor will be required to replace each unit of capital, and the MRTS will diminish. For example, think of employing more and more farm labor while reducing the number of tractor hours used. Ques%ons Ch 7 •  A firm that has posi.ve accoun.ng profit does not necessarily have posi.ve economic profit. •  True. Accoun%ng profit considers only the explicit, monetary costs. Since there may be some opportunity costs that were not considered fully realized as explicit monetary costs, it is possible that when the opportunity costs are added in, economic profit will become nega%ve. This indicates that the firm’s resources are not being put to their best use. Subtrac%ng extra costs could make the profit nega%ve, in economic terms. •  Why are isocost lines straight lines? •  The isocost line represents all possible combina%ons of two inputs that may be purchased for a given total cost. The slope of the isocost line is the nega%ve of the ra%o of the input prices. If the input prices are fixed, their ra%o is constant and the isocost line is therefore straight. Only if the ra%o of the input prices changes as the quan%%es of the inputs change is the isocost line not straight. •  Assume that the marginal cost of produc.on is increasing. Can you determine whether the average variable cost is increasing or decreasing? •  When marginal cost is increasing, average variable cost can be either increasing or decreasing as shown in the diagram below. Marginal cost begins increasing at output level q1, but AVC is decreasing. This happens because MC is below AVC and is therefore pulling AVC down. AVC is decreasing for all output levels between q1 and q2. At q2, MC cuts through the minimum point of AVC, and AVC begins to rise because MC is above it. Thus, for output levels greater than q2, AVC is increasing. Assume that the marginal cost of produc.on is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing? Yes, the average variable cost is increasing. If marginal cost is above average variable cost, each addi%onal unit costs more to produce than the average of the previous units, so the average variable cost is pulled upward. This is shown in the diagram above for output levels greater than q2. •  Dis.nguish between economies of scale and economies of scope. Why can one be present without the other? •  Economies of scale refer to the produc%on of one good and occur when total cost increases by a smaller propor%on than output. •  Economies of scope refer to the produc%on of more than one good and occur when joint produc%on is less costly than the sum of the costs of producing each good or service separately. •  There is no direct rela%onship between economies of scale and economies of scope, so produc%on can exhibit one without the other. For example, there are economies of scale producing computers and economies of scale producing carpe%ng, but if one company produced both, there would probably be no synergies associated with joint produc%on and hence no economies of scope. What is the difference between economies of scale and returns to scale? •  Economies of scale depend on the rela%onship between what happens to cost and when output is doubled i.e., how does cost change when output is doubled? •  Returns to scale depend on what happens to output when all inputs are doubled. •  The difference is that economies of scale reflect input propor%ons that change op%mally as output is increased, while returns to scale are based on fixed input propor%ons (such as two units of labor for every unit of capital) as output increases. A firm has a fixed produc.on costs of $5,000 and a constant marginal cost of produc.on of equal to $500 per unit produced Suppose a firm must pay an annual tax, which is a fixed sum, independent of whether it produces any output. The short ­run cost func.on of a company is given by the equa.on TC = 200 + 55q, where TC is the total cost and q is the total quan.ty of output, both measured in thousands. ...
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This note was uploaded on 10/20/2010 for the course ECON 303 at USC.

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