Theory of the Firm

Question 1

A business decision maker that uses factors of production (labor + capital) to produce and sell a good

Answer 1

The Firm

Question 2

There are many buyers and many sellers in the market. The goods offered by the various sellers are largely the same.

Answer 2

Competitive Market

Question 3

What is capital for a firm ?

Answer 3

Non- Financial (Factories, machinery, equipment)

Question 4

The main objective of a firm is to ?

Answer 4

Maximize profit

Question 5

Revenue is proportional to the amount of output it produces ?

Answer 5

Price Taker

Question 6

The firms average revenue and its marginal revenue equal the ?

Answer 6

Price of the good

Question 7

Everything that a firm gives up to produce the good (q)?

Answer 7

Total Cost

Question 8

The revenue(q) minus the total cost(q) will equal the ?

Answer 8

Maximum Profit(q)

Question 9

What is the formula for a production process typically modeled with a production function?

Answer 9

(q) = f(quantity,capital)

Question 10

Time horizon over which capital is fixed and quantity is a variable ?(quantity can change)

Answer 10

Short Run

Question 11

Time horizon over which capital and quantity are variables? (both can be changed)

Answer 11

Long Run

Question 12

The change (q) that would result from using one additional unit of labor

Answer 12

Marginal Product of Labor

Question 13

As the amount a firm chooses to use(laborers) increases the Marginal Product of labor ?

Answer 13

Decreases because there are more workers

Question 14

As the amount a firm chooses to use(laborers) increases the quantity of product ?

Answer 14

Is less Available

Question 15

What is composed of variable costs and fixed costs ?

Answer 15

Total Cost

Question 16

Costs that do not change as (q) changes ?

Answer 16

Fixed Costs

Question 17

Costs that change as (q) changes ?

Answer 17

Variable Costs

Question 18

Short Run formula for total cost ?

Answer 18

Fixed Cost + Variable Cost

Question 19

Long Run formula for total cost ?

Answer 19

All inputs change so Total Cost = Variable Cost

Question 20

A cost expressed through per-unit terms ?

Answer 20

Average Cost

Question 21

The total cost divided by the number of goods produced ?

Answer 21

Average Total Cost

Question 22

The fixed cost divided by the number of goods produced ?

Answer 22

Average Fixed Cost

Question 23

The Variable cost divided by the number of goods produced ?

Answer 23

Average Variable Cost

Question 24

If a firm has produced (q) units the change in total cost that results from producing a small additional amount (change in (q)) is ?

Answer 24

Marginal Cost

Question 25

What is the formula for Marginal Cost

Answer 25

TC (q+change(q)) - TC(q) / change(q)

Question 26

Short Run production functions exhibit - increasing marginal product of labor initially then the firm reaches a certain level of labor that ?

Answer 26

Faces Diminishing

Question 27

The quantity where Average Total Cost is minimized is called the?

Answer 27

Efficient Scale

Question 28

The smallest amount of good where long run average cost is minimized is the ?

Answer 28

Minimum efficient scale

Question 29

When Long Run average cost is decreasing in amount of good the firm faces _____________, - they can reduce per unit costs by producing more

Answer 29

Economies of Scale

Question 30

In the region where Long Run average cost is minimized they face ________________ small changes in amount of good wont change per unit cost

Answer 30

Constant Returns to Scale

Question 31

Where Long run average cost is increasing in amount of good they face ________________ their per unit cost can be reduced only by producing less

Answer 31

Diseconomies of scale

Question 32

Russian Born Economist that immigrated to the U.S. that conducted analyses for the U.S. military of German Industry during WWII ? (Ball Bearings)

Answer 32

Wassily Leontief

Question 33

In the short run when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if the price of the good is ?

Answer 33

less than average variable cost

Question 34

In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the price is ?

Answer 34

less than average total cost

Question 35

All firms produce at the efficient scale, price equals the minimum of average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price.

Answer 35

In this long-run equilibrium

Question 36

In the short run, an increase in demand raises prices and leads to?

Answer 36

Profits

Question 37

In short run, a decrease in demand lowers prices and leads to ?

Answer 37

losses

Question 38

If firms can freely enter and exit the market, then in the long run, the number of firms adjusts to drive the market back to the ?

Answer 38

zero-profit equilibrium