review3 - Review Exam3 Exam3Covers Chapter6...

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Review Review Exam 3 Exam 3

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Exam 3 Covers Chapter 6 Chapter 7 (with appendix) Chapter 8
Chapter 6 Concepts Production function Diminishing Returns Average Product Marginal Product Various terms and definitions

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The Production Function The production function relates inputs to output in physical terms.   It can be represented by an equation of the form y=f(x), by a graph or by a table.
Total Product Total product is another way of saying “output.”

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Average Product To find average product, divide total product (or output) by the input level.
Marginal Product Marginal product tells you how much extra output you get from each  extra unit of input.  To calculate marginal product, take the change in total product (or output) and divide by the change in input.

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MP and AP If MP > AP, then AP is increasing. If MP< AP, then AP is falling.
Example Input Output AP MP 0 0 xxx xxx 5 20 4 4 10 50 5 6 15 70 4.67 4 20 80 4 2 25 85 3.4 1 30 60 2 -5

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Three Stages of Production Stage 1, AP is rising.  (TP rising and MP positive) In Stage 2, AP is falling and MP is positive.  (TP  still positive) In Stage 3, MP is negative.  (TP is falling)
Another Type of Problem If AP = 14 and input is 10, find TP. AP   = Output/input 14 =  Output/10   Output = 140

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Returns to Scale If output increases proportionately more than inputs, we have increasing returns to scale. If output increases in the same proportion as inputs, we have constant returns to scale. If output increases proportionately less than input, we have decreasing returns to scale.
Chapter 7:  Costs  Total Cost (TC) = Variable Costs (VC) + Fixed  Costs (FC) AC (ATC) = TC divided by output or AC= AVC +  AFC AVC = VC divided by output AFC = FC divided by output

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Working with Costs You can use the information to derive different things.   Example:  AC = 50  AFC = 10 output =20 Find VC AVC = AC – AFC  (AC = AVC + AFC) AVC = 50 – 10  = 40      VC = AVC*output                             VC = 40*20 = 800
Another Example AVC = 20  AFC = 5   output  = 10 Find TC   AC = 20 + 5 = 25     TC = 25*10 = 250

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Chapter 8 Chapter 8 Review of Some Key Concepts Review of Some Key Concepts
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review3 - Review Exam3 Exam3Covers Chapter6...

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