Assume a firm has the following cost and revenue
characteristics at its current level of output: price=
$8.00, average variable cost=$6.00 and average
fixed cost =$4.00. In the long run, the firm
Should shut-down as its making a loss of $2
Which of the fo
Increasing returns to scale
When the proportional increase in output is larger than an
underlying proportional increase in input.
Constant returns to scale
When a given percentage increase in all inputs leads to an
identical percentage increase in output.
Planning period with complete input flexibility
Long-run cost relationship
Short-run cost relationship
Short-run cost curve
Cost-output relation for a specific plant and
Long-run cost curve
Factors outside the control of the firm, such as consumer
incomes, competitor prices, and the weather.
It measures elasticity at a given point on a function.
Average elasticity over a given range of a fu
Discrete production function
Production function with distinct input patterns.
Continuous production function
production function where inputs can be varied in an
unbroken marginal fashion.
Returns to scale
Output effect of a proportional increase in all
Responsiveness of demand for one product to changes in
the price of another.
Equation for Cross-Price Elasticity
(Change in Qy / Change in Qp)(Px/Qy)
Falls within rising income, and rises with falling income
Theory of the Firm
Basic model of business
Expected Value Maximization
Optimization of profits in light of uncertainty and
the time value of money.
Value of the Firm
PV of the firm's expected future net cash flows.
Residual of sales reve
Change in total revenue associated with a 1-unit change in
Activity level that generates the highest revenue, MR=0
Relations between cost and output
Short-run cost functions
Cost relations when f
Demand for inputs used in production
Change in quantity demanded
movement along a given demand curve reflecting a change
Shift in demand
Switch from one demand curve to another following a
change in non-price determinant of demand
Products that serve the same purpose.
Products that are best consumed together.
Goods and services that satisfy the same need or desire.
Goods and services consumed together in the same