Week 5

Question 1

describe producer theory

Answer 1

• goal, profit max
• profit = tr - tc
• assumptions: firm produces single good, firm already chosen which product to produce, the more inputs the firm uses the more output it makes

Question 2

what are the production functions

Answer 2

• inputs: labour, capital
• outputs: q
• production function: q = f (L,K)

Question 3

describe short run

Answer 3

some inputs are variable, some are fixed
- variable input: labour, can be changed in the sr
- fixed input: capital, cannot be changed in the sr

Question 4

describe long run

Answer 4

all inputs are variable, therefore more flexible

Question 5

describe marginal product of labour (MPL)

Answer 5

additional output the firm can produce by using an additional unit of labour (keeping capital fixed)

Question 6

describe diminishing marginal product of labour

Answer 6

as a firm hires additional units of labour, the marginal product of labour falls

Question 7

describe long run production decisions

Answer 7

• trade off between L and K
• isoquants

Question 8

describe Cobb-Douglas

Answer 8

• Output (q) depends on capital (K) and labour (L) according to a relationship:
• q = KaLb

Question 9

describe isoquants

Answer 9

an envelope which shows what combinations of inputs can be used to produce a given level of output
- same as indifference curves, isoquants are downward sloping and cannot intersect

Question 10

describe marginal rate of technical substitution

Answer 10

• cobb-douglas production function
• (MRTSl,k), rate which firm can trade labour for capital, holding the output constant

Question 11

describe isoquants special cases

Answer 11

refer to week 5 slide 12 for answers

Question 12

describe returns to scale

Answer 12

change in the amount of output in response to a proportional increases of the inputs
- production function has constant returns to scale if changing amount of capital and labour by some multiple changes the q of output by the exact same multiple
- production function has increasing returns to scale if changing amount of capital and labour by some multiple changes the quantity of output more than proportionally (doubling)
- production function has decreasing returns to scale if changing capital and labour by some multiple changes q of output less than proportionally

Question 13

describe technology change (total factor productivity growth)

Answer 13

an improvement in technology that changes the firms production function such that more output is obtained from the same amount of inputs
- Q = Af(k,L)

Question 14

describe short run cost functions

Answer 14

total cost = fixed cost + variable cost
fixed cost - fixed input - capital - r (rental rate)
variable cost - variable input - labour - w (wage rate)

Question 15

describe costs on diagram

Answer 15

shape of total costs is determine by the law of diminishing marginal product in the short run
- refer to week 5 slide 17 for example

Question 16

describe long run cost minimisation

Answer 16

• firms choose K and L to maximise production efficiency
• cost minimisation: economically efficient input combination for a given q

Question 17

describe isocost lines

Answer 17

shows what combination of the 2 inputs can be employed for a given cost

Question 18

describe economies of scale

Answer 18

• if doubling the output causes cost less than double (tc rises at a slower rate than output rises)
• may be due fixed costs, specialisation, quality of machinery

Question 19

describe diseconomies of scale

Answer 19

• if doubling output causes cost to more than double (tc rises at a faster rate than input rises)
• may be due to managerial diseconomies, bureaucracy, geographical diseconomies