Final exam

Question 1

theory of the firm

Answer 1

explanation of how a firm makes cost minimizing production decisions and how its cost varies with its output

Question 2

production decision steps

Answer 2

production technology
cost constraints
input choices

Question 3

factors of production

Answer 3

inputs into the production process

Question 4

production function

Answer 4

function showing the highest output that a firm can produce for every specified combination of inputs q=F(K,L) where K= capital and L= labor

Question 5

short run

Answer 5

period of time in which quantities of one or more production factors cannot be changed

Question 6

fixed input

Answer 6

production function that cannot be varied, usually capital

Question 7

long run

Answer 7

amount of time needed to make all production inputs variable

Question 8

average product

Answer 8

output per unit of particular input

Question 9

total output (q)=

Answer 9

K+L

Question 10

average product=

Answer 10

(q/L)

Question 11

marginal product=

Answer 11

(change in q/ change in L)

Question 12

law of diminishing marginal returns

Answer 12

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

Question 13

labor productivity

Answer 13

average product of labor for an entire industry or economy as a whole

Question 14

stock of capital

Answer 14

total amount of capital available for use in production

Question 15

isoquant

Answer 15

curve showing all possible combination of inputs that yield the same output

Question 16

marginal rate of technical substitution

Answer 16

amount quantity of one input can be reduced when an extra of the other is used to keep output the same

Question 17

MRTS=

Answer 17

• change in K/ change in L

for a fixed output, q

Question 18

fixed proportions production function

Answer 18

production function with L-shaped isoquants, so that only 1 combination of labor and capital can be used to produce each level of output

Question 19

returns to scale

Answer 19

rate at which output increases as inputs are increased proportionately

Question 20

increasing returns to scale

Answer 20

output more than doubles when inputs double

Question 21

constant returns to scale

Answer 21

outputs double when inputs double

Question 22

decreasing returns to scale

Answer 22

output less than doubles when inputs double

Question 23

accounting cost

Answer 23

actual expenses plus depreciation, economists don’t care about this

Question 24

economic cost

Answer 24

the cost of utilizing resources in production, costs relevant to production

Question 25

opportunity cost

Answer 25

cost associated with opportunities that are foregone by not putting the firm's resources to their best alternative use

Question 26

economic cost=

Answer 26

opportunity cost

Question 27

sunk cost

Answer 27

expenditure that has been made already and cannot be recovered

Question 28

total cost

Answer 28

total economic cost of production

Question 29

fixed cost

Answer 29

a cost that does not vary with the level of output and that can only be eliminated by going out of business

Question 30

variable cost

Answer 30

a cost that varies as output varies

Question 31

TC=

Answer 31

FC+VC

Question 32

amortization

Answer 32

policy of treating a one time expenditure as an annual cost spread out over some number of years

Question 33

marginal cost

Answer 33

increase in cost resulting from the production of one extra unit of output

Question 34

MC=

Answer 34

change in VC/ change in q and change in TC/ change in q

Question 35

average total cost=

Answer 35

TC/q

Question 36

average fixed cost=

Answer 36

FC/q

Question 37

average variable cost=

Answer 37

VC/q