Chapter 7: Producers in the Short Run

Question 1

What are the four types of inputs firms use for production?

Answer 1

Intermediate inputs Inputs provided directly by nature (land) Services of labour Services of physical capital (machines/facilities)

Question 2

What is an intermediate input?

Answer 2

Inputs that are outputs from some other firm eg electricity

Question 3

What is a production function?

Answer 3

The function which shows the maximum output that can be produced by any given combination of inputs Q = f(L,K)

Question 4

How are profits calculated?

Answer 4

Profit = Total Revenue - Total Costs

Question 5

How are accounting profits calculated?

Answer 5

Accounting Profits = Total Revenue - Explicit Costs

Question 6

How are economic profits calculated?

Answer 6

Economic Profits = Total Revenue - (Explicit + Implicit costs) pi = TR - TC

Question 7

What are explicit costs?

Answer 7

The hiring of workers, the rental of equipment, interest payments on debt, the purchase of intermediate inputs

Question 8

What are implicit costs?

Answer 8

The opportunity cost of the owner’s time and the opportunity cost of the owner’s capital

Question 9

When referring to a firm’s profit, we always refer to mean _____ profit

Answer 9

economic (Total revenue - Explicit - Implicit costs)

Question 10

What is a fixed factor?

Answer 10

An input that does not change in the short run Usually an element of capital but could be land, services, etc)

Question 11

What are variable factors?

Answer 11

Inputs that are not fixed and can be varied in the short term

Question 12

What is the long term?

Answer 12

The length of time over which all of the firm’s factors of production can be varied but its technology is fixed

Question 13

What is the difference between the long run and the VERY long run?

Answer 13

Technology can be varied

Question 14

What is total product?

Answer 14

The total amount produced during a given period of time

Question 15

What is average product?

Answer 15

The total product divided by the number of units of the variable factor used to produce it AP = TP / L Where L is number of units of labor

Question 16

What is the marginal product?

Answer 16

The change in total output that results from using one or more unit of a variable factor MP = deltaTP/deltaL

Question 17

According to the law of diminishing returns: as more workers are added to a production process, each can specialize in one task, and the workers’ marginal product initially _____ BUT If there is a fixed amount of physical capital, eventually the marginal product is likely to ___

Answer 17

Rises Fall

Question 18

When AP is in maximum: AP _ MP When AP is increasing: MP _ AP When AP is decreasing: MP _ AP

Answer 18

AP max: AP = MP AP inc : MP > AP AP dec : MP < AP

Question 19

Ceteris Paribus - If increasing amounts of a variable factor are applied to a given quantity of a fixed factor, eventuall a situation will be reached in which the marginal product of the variable (increases/decreases)

What is a consequence of this?

Answer 19

Decreases

To increase the output, more and more of the variable factor must be given

This means each successive unit of the variable factor has less and less of the fixed factor to work with

Eventually equal increases in work effort begin to add less and less to total output

Question 20

How do you calculate (Average) Total cost?

Answer 20

(Average) Total cost = [Average/Total] Fixed Cost + [Average/Total] Variable Cost

Question 21

What is total fixed cost?

Answer 21

The cost of the fixed factor(s)

DOES NOT VARY with the level of output

eg annual cost for renting a factory

Question 22

What is total variable cost?

Answer 22

The cost of the variable factors

Varies DIRECTLY with the level of output

eg Labour Costs, Material Costs

Question 23

How do you calculate marginal cost?

Answer 23

MC = delta(TVC)/delta(Q)

since

MC = delta(TC)/delta(Q) = delta(TFC)/delta(Q) + delta(TVC)/delta(Q)

NB delta(TFC)/delta(Q) = 0 because TFC does not change with the level of output

Question 24

What is the shape of the ATC Curve?

Answer 24

“U Shaped”

Question 25

When does the Marginal Cost curve intersect with the ATC, AVC and AFC curves?

Answer 25

At their minima

Question 26

Each additional worker adds (the same amount/different amounts) to the total cost but (the same amount/different amounts) to total output

Answer 26

Same

Different

Question 27

As AP rises, AVC is (rising/falling)

Answer 27

Falling

Question 28

When is AVC at its minimum?

Answer 28

When AP reaches its maximum

Question 29

What does a diminishing Marginal P`rice of variable factors imply?

Answer 29

An eventually rising Marginal Cost

Question 30

When does MC reach its minimum?

Answer 30

When MP reaches its maximum

Question 31

How is a firms capacity defined?

Answer 31

The level of output that corresponds to the minimum short-run ATC

The largest output that can be produced without encountering rising average costs per unit

Question 32

What happens when a firm has excess capacity?

Answer 32

A firm produces at an output that is less than the point of minimum ATC