firms

Question 1

short-run assumptions for production

Answer 1

• set level of capital
  set level of factory space + machinery
  only choice that remains is how much labour to hire

Question 2

define marginal product

Answer 2

the additional output produced when one more unit of the input is hired (holding all other inputs fixed)

Question 3

what is the marginal product of labour

Answer 3

the derivative of f(l,k̅) with respect to l

also represents the slope of the SR production func. and is equal to the slope of the profit line (w/p)

Question 4

law of diminishing marginal returns

Answer 4

as we increase an input (holding all other factors fixed) eventually marginal product decreases, which means that eventually the slope is concave down

Question 5

formula

marginal revenue product

Answer 5

p * marginal product of labour

Question 6

what does the slope of of f(l,k̅) tell you

Answer 6

how much x will increase if you increase l by 1

Question 7

why do profit maximizing firms produce on the production func. curve

Answer 7

bc they utilize all the labour that thye hire

Question 8

profit maximizing equation

Answer 8

max. (profit equation) s.t. x=f(l,k̅)

Question 9

SR profit equation

Answer 9

px – wl

Question 10

firms keep hiring workers as long as…

Answer 10

what they cost is less than the revenue they produce

Question 11

how do we derive the labor demand curve from the marginal revenue product curve

Answer 11

the MRP after the break even wage

Question 12

supply function

Answer 12

x(p,w̅)

Question 13

how do we derive the supply curve from the supply func.

Answer 13

supply func. after the break-even price (before that the curve is just a vertical line at x=0)

Question 14

what conditions have to hold in the LR at the profit maximizing production plan

Answer 14

pMPₗ=w and pMPₖ=r

Question 15

firms should produce where price=MC as long as…

Answer 15

their price is above the break-even price

Question 16

what does an isoquant tell us

Answer 16

all the combinations of l and k that can produce a certain level of output

Question 17

TRUE or FALSE

firms are indifferent btwn the prod. plans on an isoquant

Answer 17

FALSE

firms are indifferent btwn production plans that result in the same level of profit

Question 18

what is the TRS (technical rate of substitution)

Answer 18

the slope of an isoquant: it tells us how much of k we can let go of when we hire 1 more worker and produce the same as before

Question 19

slope of a budget line (isocost)

Answer 19

– w/r

Question 20

define

returns to scale

Answer 20

what happens when we increase both l and k by the same proportion

Question 21

cost minimization equation

Answer 21

min. (wl+rk) s.t. x=f(l,k)

Question 22

increasing returns to scale

Answer 22

f(tl, kl) > t * f(l, k)

i.e. if i double the input, i’m going to more than double the output

Question 23

decreasing returns to scale

Answer 23

f(tl, kl) < t * f(l, k)

i.e. if i double the input, i’m going to less than double the output

Question 24

constant returns to scale

Answer 24

f(tl, kl) = t * f(l, k)

i.e. if i double the input, i’m also going to double the output

Question 25

when we produce in a cost minimizing way, we chose production plans where the condition xxx holds

Answer 25

MPₗ/MPₖ = w/r

Question 26

TRUE or FALSE when a firm is profit maximizing, it is also cost minimizing

Answer 26

TRUE

Question 27

TRUE or FALSE when a firm is cost minimizing, it is also profit maximizing

Answer 27

FALSE

Question 28

what does it mean if you cost minimize and produce where price=MC

Answer 28

you are profit maximizing

Question 29

what happens to a firm's chosen production plan if w increases

Answer 29

* sub. effect: we are substituting away from labor and towards capital * income effect: input price is increasing so x decreases in graph: steeper ray, below x

Question 30

what happens to a firm's chosen production plan if w decreases

Answer 30

* sub. effect: we are substituting towards labor and away from capital * income effect: input price is decreasing so x increases in graph: shallower ray, above x

Question 31

what happens to a firm's chosen production plan if k increases

Answer 31

* sub. effect: we are substituting towards labor and away from capital * income effect: input price is increasing so x decreases in graph: shallower ray, below x

Question 32

what happens to a firm's chosen production plan if k decreases

Answer 32

* sub. effect: we are substituting away from labor and towards capital * income effect: input price is decreasing so x increases in graph: steeper ray, above x

Question 33

which labour demand is more elastic? LR or SR

Answer 33

LR

Question 34

which are the 2 reasons for which LR AC could be U-shapes

Answer 34

* MC has a portion with IRS it includes fixed costs

Question 35

In the SR, which portion of the MC is ↑MPₗ and which is ↓MPₗ

Answer 35

* ↑MPₗ when MC is downard sloping * ↓MPₗ when MC is upward sloping

Question 36

In the LR, which portion of the MC is IRS and which is DRS

Answer 36

* IRS when MC is downard sloping * DRS when MC is upward sloping

Question 37

average cost formula

Answer 37

(total cost)/x

Question 38

for profit maximization, firms are going to choose a price so long as xxx

Answer 38

p >= break even price

Question 39

revenue formula

Answer 39

px

Question 40

total cost formula

Answer 40

AC * x

Question 41

is the LR or SR supply curve shallower and why

Answer 41

LR: when p imcreases, you can initially produce more on the SR supply curve, but in the LR ypu can produce even more at that price bc you can more optimally adjust l and k

Question 42

fundamental distinction btwn LR and SR

Answer 42

SR: # of firms is fixed LR: # of firms is not fixed bc of entry and exit

Question 43

# define LR equilibrium

Answer 43

none of the firms inside the industry want to exit, none outside want to enter

Question 44

does a change in recurring FC affect MCˢʳ or ACˡʳ

Answer 44

ACˡʳ

Question 45

does a change in per unit cost affect MCˢʳ or ACˡʳ

Answer 45

both

Question 46

does a change in r affect MCˢʳ or ACˡʳ

Answer 46

ACˡʳ

Question 47

does a change in w affect MCˢʳ or ACˡʳ

Answer 47

both

Question 48

how can we tell if a firm has DRS from the cobb-douglas production function

Answer 48

if the sum of the exponents < 1

Question 49

how can we tell if an input has decreasing marginal product from the cobb-douglas production function

Answer 49

if the exponent of that input < 1