Chapter 7

Question 1

Describe what a business firm is

Answer 1

2. Organization, owned and operated by private individuals

3. Specializes in production

Question 2

Production

Answer 2

Process of combining inputs to make goods and services

Question 3

Techonology

Answer 3

Methods available for combining inputs to produce a good or service

Question 4

Long run VS short run

Answer 4

1. Short run - A time horizon during which at least one of the firm’s inputs cannot be varied
2. Long run - A time horizon long enough for a firm to vary all of its inputs.

Question 5

Marginal product of labor

Answer 5

(MPL= ΔQ/ΔL)

i. The additional output produced when one more worker is hired
ii. Change in total product (ΔQ) divided by the change in the number of workers employed (ΔL)
iii. Tells us the rise in output produced when one more worker is hired

Question 6

Total Product

Answer 6

1. t – The Maximum quantity of output that can be produced for a given combination of inputs

Question 7

the law of diminishing returns

Answer 7

2. LDR - As more and more of an input is added to a fixed amount of other inputs, its marginal product will eventually decline.

Question 8

Marginal production of labor

Answer 8

the additional output produced when one more worker is hired.

Question 9

Fixed cost and variable cost

Answer 9

1. Fixed cost – Costs of fixed inputs, which remain constant as output changes.
2. Variable costs – Costs of variable inputs, which change with output.

Question 10

total cost in terms of total fixed cost and total variable cost

Answer 10

1. TVC – The cost of all variable inputs used in producing a particular level of output
2. TFC – the cost of all inputs that are fixed in the short run
3. TC – The costs of all inputs – fixed and variable – used to produce a given output level in the short run

Question 11

average total cost in terms of average fixed cost and average variable cost.

Answer 11

1. Average total Cost – Total cost divided by the number of outputs produced.
2. Average variable cost – Total variable cost divided by the quantity of output produced.
3. Average fixed cost – total fixed cost divided by the quantity of output produced.

Question 12

Marginal cost

Answer 12

The increase in total cost from producing one more unit of output.

Question 13

Mariginal cost as productin changes

Answer 13

Increasing marginal returns to labor – The marginal product of labor increases as more labor is hired.
Diminishing marginal returns to labor – The marginal product of labor decreases as more labor is hired.

Question 14

11. Explain the shape of the long-run average total cost curve in terms of economies of scale, constant returns to scale, and diseconomies of scale.

Answer 14

Diseconomies of scale – Long run average total cost increases as output increases.
Economics of scale - Long run average total cost decreases as output increases.
Long run average total cost – the cost per unit of producing each quantity of output in the long run, when all inputs are variable.
Constant returns to scale – Longrun average total cost is unchanged as output inscreases.

Question 15

Long run total cost

Answer 15

– the cost of producing each quantity of output when all inputs are variable and the least-cost input mix is chosen.

Question 16

Least cost rule

Answer 16

– A firm produces any given output level using the lowest cost combination of inputs available.