Chapter 6: Production and Business Organization

Question 1

The production function:

Answer 1

It specifies the maximum output that can be produced with a given quantity of inputs. It is defined for a given state of engineering and technical knowledge.

Question 2

Law of diminishing returns:

Answer 2

A firm will get less and less extra output when it adds additional units of an input while holding other inputs fixed.

Question 3

Returns to scale:

Answer 3

Returns to scale is a term that refers to the proportionality of changes in output after the amounts of all inputs in production have been changed by the same factor. Technology exhibits increasing, decreasing, or constant returns to scale.

Question 4

Network markets:

Answer 4

Network markets are special because consumers derive benefits not simply from their own use of a good but also from the number of other consumers who adopt the good.

Question 5

Productivity:

Answer 5

Concept measuring the ratio of total output to a weighted average of inputs.

Question 6

Productivity grows because of:

Answer 6

• Technological advances (process and product innovations)
• Economies of scale (the larger scale of inputs and production will lead to greater productivity)
• Economies of scope (occur when a number of different products can be produced more efficiently together than apart)