SM_Econ_11_Micro_ch11[1]

SM_Econ_11_Micro_ch11[1] - Chapter 11 OUTPUT AND COSTS...

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A n s w e r s t o t h e R e v i e w Q u i z z e s Page 252 1. Distinguish between the short run and the long run. The short run is a period of time during which the quantity of at least one factor of production is fixed and cannot be changed. The long run is a period of time ling enough so that the quantities of all factors of production can be varied. 2. Why is a sunk cost irrelevant to a firm’s current decisions? Sunk cost is irrelevant because it cannot be changed by any decision. It is already incurred and so must be paid. The only costs that concern the firm are costs that the firm can change with its current decisions. Page 256 1. Explain how the marginal product of labor and the average product of labor change as the quantity of labor employed increases (a) initially and (b) eventually. Initially, as the quantity of labor is increases, the firm experiences increasing marginal returns , which means that the marginal product increases as more labor is employed. Increasing marginal returns occur because hiring additional workers allows the workers to specialize and become more productive. Eventually, the firm will experience diminishing marginal returns which means that the marginal product decreases as more labor is employed. Decreasing marginal returns occur because eventually the gains from specialization diminish and because more and more workers are working with the same fixed amount of capital. The average product of labor follows the marginal product of labor. Initially, when the marginal product of labor is increasing, the average product also increases. As long as the marginal product of labor exceeds the average product of labor, the average product continues to increase. Eventually when the marginal product is falling it falls enough so that it is less than the average product, at which point the average product of labor decreases. 2. What is the law of diminishing returns? Why does marginal product eventually diminish? The law of diminishing returns states that as a firm uses more of a variable factor of production with a given quantity of fixed factors of production, the marginal product of the variable factor eventually diminishes . Diminishing marginal returns arises from the fact that ever more workers are using the same capital and working in the same space. 3. Explain the relationship between marginal product and average product. As the quantity of labor initially increases the firm experiences increasing marginal returns and the marginal product of labor increases. The marginal product of labor is greater than the average 11 OUTPUT AND COSTS C h a p t e r
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1 9 4 product over this range of labor, so the average product of labor increases when the quantity of labor increases. Eventually, diminishing marginal returns causes the marginal product of labor to fall. When the marginal product of labor falls below the average product, the average product decreases as the quantity of labor increases. Page 261
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SM_Econ_11_Micro_ch11[1] - Chapter 11 OUTPUT AND COSTS...

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