Study Guide Midterm 2.pdf

The production function specifies the maximum amount

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The Production Function specifies the maximum amount of output that a firm can produce with a given quantity of inputs and for a given state of technology. The Law of Diminishing Returns states that if we vary one of the inputs, keeping all other inputs as well as the technological level constant, then, at least after some point, successive additional units of the variable input will add less and less to the Total out- put. That is, the Marginal Product of each additional unit of the variable input will decrease as the amount of that input increases, all else equal. 1
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Short Run is defined as a period of time in which only the variable inputs, such as labor and materials, could be adjusted. Long Run is defined as a period of time in which all inputs, in- cluding fixed factors, such as capital, could be adjusted. Assuming that firms produce efficiently, the Total Cost (TC) rep- resents the total amount of money spent in all the inputs required for the a business firm on order to produce a given level of output. Fixed Costs, (FC), are the costs that the firm has to pay even is it does not produce anything. Fixed costs do no depend on the level of output produced. Variable Costs, (VC), are the costs that vary and are directly related to output.
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