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### 34 Cards in this Set

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 ﻿Production function ﻿defines the relationship between inputs and the maximum amount that can be produced within a given period of time with a given level of technology. ﻿production function; Mathematically, the production function can be expressed as ﻿Q=f(X1, X2, ..., Xk) ﻿Q ﻿level of output ﻿X1, X2, ..., Xk ﻿inputs used in the production process ﻿production function of two inputs ﻿Q=f(X, Y) III.Q: output IV.X: Labor V.Y: Capital ﻿short-run production function ﻿shows the maximum quantity of good or service that can be produced by a set of inputs, assuming the amount of at least one of the inputs used remains unchanged. ﻿long-run production function ﻿ shows the maximum quantity of good or service that can be produced by a set of inputs, assuming the firm is free to vary the amount of all the inputs being used. ﻿Marginal product (MP) ﻿ change in output (or Total Product) resulting from a unit change in a variable input. MPx= /\Q ------ /\X ﻿Average Product (AP): ﻿Total Product per unit of input used. APx = Q --- X ﻿If MP > AP ﻿AP is rising. ﻿If MP < AP ﻿then AP is falling. ﻿MP=AP ﻿when AP is maximized. ﻿Law of Diminishing Returns ﻿As additional units of a variable input are combined with a fixed input, at some point the additional output (i.e., marginal product) starts to diminish ﻿The Three Stages of Production in the Short Run ﻿Stage I: From zero units of the variable input to where AP is maximized (where MP=AP) B.Stage II: From the maximum AP to where MP=0 C.Stage III: From where MP=0 on ﻿In the short run, rational firms should only be operating in ﻿Stage II ﻿Why In the short run, rational firms should not be operating in Stage III ﻿Firm uses more variable inputs to produce less output ﻿Why In the short run, rational firms should not be operating in Stage I ﻿Underutilizing fixed capacity B.Can increase output per unit by increasing the amount of the variable input ﻿Total Revenue Product (TRP) ﻿market value of the firm’s output, computed by multiplying the total product by the market price. ﻿TRP = ﻿Q · P ﻿Marginal Revenue Product (MRP): ﻿change in the firm’s TRP resulting from a unit change in the number of inputs used. ﻿MRP = ﻿MP · P ﻿Total Labor Cost (TLC) ﻿total cost of using the variable input, labor, computed by multiplying the wage rate by the number of variable inputs employed. ﻿TLC= ﻿= w · X ﻿Marginal Labor Cost (MLC): ﻿change in total labor cost resulting from a unit change in the number of variable inputs used. Because the wage rate is assumed to be constant regardless of the number of inputs used, MLC is the same as the wage rate (w). ﻿A profit-maximizing firm operating in perfectly ﻿competitive output and input markets will be using the optimal amount of an input at the point at which the monetary value of the input’s marginal product is equal to the additional cost of using that input. B.MRP = MLC ﻿If all inputs into the production process are doubled, three things can happen: ﻿output can more than double 1.increasing returns to scale (IRTS) B.output can exactly double 1.constant returns to scale (CRTS) C.output can less than double 1.decreasing returns to scale (DRTS) ﻿One way to measure returns to scale is to use a coefficient of output elasticity: Eq = percent change in Q ------------------------------------- percent change in all inputs ﻿If EQ > 1 ﻿then IRTS ﻿If EQ = 1 ﻿then CRTS ﻿If EQ < 1 \ ﻿then DRTS ﻿Returns to scale can also be described using the following equation ﻿hQ = f(kX, kY) ﻿If h > k ﻿then IRTS ﻿If h = k ﻿then CRTS ﻿If h < k ﻿then DRTS