Chapter 03

Question 1

Factors of production

Answer 1

The inputs used to produce goods and services.

Question 2

The Production Function

Answer 2

Reflects the available technology for turning capital into labor.

Y = F(K, L), K=Kbar L=Lbar
Y is the amount of output (result)
K is the capital (the set of tools workers use)
L is the labor (the time people spend working)

Question 3

Constant returns to scale

Answer 3

If an increase of an equal percentage in all factors of production (K, L) causes an increase in output of the same percentage.

zY = F(zK, zL)

Question 4

Factor prices

Answer 4

The amount paid to the factors of production.

Question 5

Competition

Answer 5

A situation in which there are many individuals or firms, so that the actions of any one of them do not influence the market prices.

Question 6

Competitive firm

Answer 6

Is small relative to the markets in which it trades, so it has little influence on market prices.

Question 7

Profit

Answer 7

Goal of a firm is to maximize profit. Profit is revenue minus costs.

Question 8

MPL Marginal Product of Labor

Answer 8

The extra amount of output a firm gets from one extra unit of labor, holding the amount of capital fixed.

MPL = F(K, L + 1) - F(K, L)

Question 9

Diminishing marginal product

Answer 9

Holding the amount of capital fixed, the marginal product of labor decreases as the amount of labor increases.

Question 10

Real Wage

Answer 10

Wage (numerator) to Price (what a unit of output sells for)

Question 11

Change in Profit

Answer 11

Change in Profit = Change in Revenue - Change in cost

Change in Profit = (P x MPL) - W