Production

Question 1

Define production.

Answer 1

The process by which a person, company, government or non-profit agency uses inputs to create a good or service for which others are willing to pay

Question 2

Define production function.

Answer 2

A mathematical relationship that describes how much output can be made from different combinations of inputs

Question 3

Define short run.

Answer 3

The period of time during which one or more inputs into production cannot be changed

Question 4

Define long run.

Answer 4

The period of time during which all inputs into production are fully adjustable

Question 5

What two inputs can a firm use to make its product?

Answer 5

Capital and labour

Question 6

Name 6 assumption to model producer behaviour.

Answer 6

1. ) The firm produces a single good
2. ) The firm has already chosen which product to produce
3. ) The firm’s goal is to minimise the cost of production
4. ) The more input a firm uses the more output it makes
5. ) The firm can buy as many capital or labour inputs a it wants at fixed prices
6. ) Firms face no capital restraint

Question 7

What can and can’t firms change in the short run?

Answer 7

They can change labour as much as they want, but not how much capital it uses

Question 8

What type of marginal returns to a firm’s production exhibit to labour and capital?

Answer 8

Diminishing marginal returns

Question 9

What variables make up the production function

Answer 9

Capital and labour

Question 10

What is the general equation for a production function?

Answer 10

Q = f(K,L)

Question 11

In the long run what do producers behave just like?

Answer 11

Consumers

Question 12

What is the production function similar to?

Answer 12

The utility function

Question 13

Define the marginal product of labour.

Answer 13

The extra output that you can produce using one extra unit of labour

Question 14

Define the marginal product of capital.

Answer 14

The extra output you can produce using one extra unit of capital

Question 15

Define isoquant.

Answer 15

A curve representing all the combinations of inputs that allow a firm to make a particular quantity of output

Question 16

What is the isoquant similar to?

Answer 16

The indifference curve

Question 17

Define marginal rate of technical substitution.

Answer 17

The rate at which the firm can trade input X for input Y holding output constant

Question 18

In what part of the isoquant is marginal product of labour high relative to the marginal product of capital?

Answer 18

To the left

Question 19

What is the MRTS the ratio of?

Answer 19

MPL/MPK

Question 20

What is meant by MRTS being 12?

Answer 20

You are willing to substitute 12 units of capital for one unit of labour

Question 21

How does MRTS relate to the isoquant?

Answer 21

It is -1 times the slope

Question 22

Define isocost line.

Answer 22

A curve that shows all of the input combinations that yield the same cost

Question 23

What is the isocost line similar to?

Answer 23

Budget constrain line

Question 24

What is the general equation for the isocost line?

Answer 24

C = rK + wL, where r is the unit cost of capital and w the unit cost of labour

Question 25

Draw a isocost line and isoquant.

Answer 25

Picture

Question 26

What is held constant as you move along the isoquant?

Answer 26

Units of output

Question 27

What do producers want to maximise and minimise?

Answer 27

They want to maximise output and minimise costs

Question 28

What is more useful cost minimisation or output maximisation?

Answer 28

Cost minimisation

Question 29

What is the name of particular equation we use for the production function?

Answer 29

Cobb-Douglas

Question 30

What is the Cobb-Douglas equation for production?

Answer 30

Q = K^aL^b

Question 31

How do we determine the optimum amount of capital and labour we will use from the isoquant and isocost line?

Answer 31

When the slopes are the same

Question 32

What is meant by output maximisation?

Answer 32

Looking at output subject to costs

Question 33

What is meant by cost minimisation?

Answer 33

Looking at costs subject to output

Question 34

How do you find the optimum amount of capital and labour numerically?

Answer 34

The slope of the isoquant = w/r (unit prices) = MRTS We know MRTS = MPL/MPK so sub in the two equation for MPL and MPK to then set equal to the value of w/r, and find an equation of L in terms of K. Then if we are output maximisation sub into the isocost and if we are cost minimisation sub into the isoquant.

Question 35

What does the long-run expansion path graph show in this case?

Answer 35

How cost minimising levels of capital and labour change as the market changes

Question 36

How do you find the long-run expansion path?

Answer 36

Plot different isoquant lines and the corresponding isocost lines and then join up the cost minimisation points

Question 37

Draw the long run expansion path

Answer 37

Picture.

Question 38

Does the long run expansion path have to be a straight line.

Answer 38

No

Question 39

What do total cost curve graphs show?

Answer 39

How the cost changes as output changes

Question 40

What is fixed in the short run?

Answer 40

Capital

Question 41

How do you find the optimum levels of output in the short run compared to the long run?

Answer 41

Instead you'll have to use fixed value for K and then substitute that in

Question 42

What does the short-run expansion path look like?

Answer 42

A straight line

Question 43

Why is the short-run expansion path a straight line?

Answer 43

In the short term they must use 70 units of output, so all outputs will lie on this line even if the market changes

Question 44

How do the cost in the short run and long run compare?

Answer 44

Higher in the short run

Question 45

What does economics of scale look at?

Answer 45

What happens when you change the units of labour and or capital

Question 46

Why is economics of scale only a property for the long run?

Answer 46

Because in the short run you can't change capital so it doesn't make sense to ask this question

Question 47

Define returns to scale.

Answer 47

A change in the amount of output in response to a proportional increase in all of the inputs

Question 48

Define constant returns to scale.

Answer 48

A production function for which changing all inputs by the same proportion changes the quantity of the output by the same proportion

Question 49

Define increasing returns to scale.

Answer 49

A production function for which changing all inputs but the same proportion changes output more proportionately

Question 50

Define decreasing returns to scale.

Answer 50

A production function for which changing all inputs by the same proportion changes output less proportionately

Question 51

If I double all inputs what new and old levels of output show decreasing returns to scale?

Answer 51

Qnew < 2Qold

Question 52

If I double all inputs what new and old levels of output show constant returns to scale?

Answer 52

Qnew = 2Qold

Question 53

If I double all inputs what new and old levels of output show increasing returns to scale?

Answer 53

Qnew > 2Qold

Question 54

Define expansion path.

Answer 54

A curve that illustrates how the optimal mis of inputs varies with total output

Question 55

Define total cost curve.

Answer 55

A curve that shows a firm's cost of producing particular quantities

Question 56

Define diminishing marginal product.

Answer 56

As a firm hires additional units of a given input, the marginal product of that input falls

Question 57

What is diminishing marginal product similar to?

Answer 57

Diminishing marginal utility

Question 58

What shows the diminishing marginal product of labour numerically?

Answer 58

If you differentiate MPL with respect to labour it should be <0

Question 59

Define marginal product.

Answer 59

The additional output that a firm can produce by using an additional unit of an input, holding the other one constant