Econ Test 2 Chapter 6

Front 1

production function is

Back 1

the relationship between the quantity of inputs a firm uses and the quantity of output it produces.

Front 2

fixed input is

Back 2

an input whose quantity is fixed for a period of time and cannot be varied.

Front 3

A variable input is

Back 3

an input whose quantity the firm can vary at any time.

Front 4

The long run is

Back 4

the time period in which all inputs can be varied.

Front 5

The short run is

Back 5

the time period in which at least one input is fixed.

Front 6

The total product curve shows

Back 6

how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

Front 7

The marginalproduct of an input is

Back 7

the additional quantity of output that is produced by using one more unit of that input.

Front 8

Marginal Product of Labor is

Back 8

the additional quantity of output from using one more unit of labor.

Front 9

There are diminishing returns to an input when

Back 9

an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input. As we add more and more workers, eventually we get less and less output. An additional worker cannot add as much output as previous worker.

Front 10

The marginal product of labor (orany other input) is defined as

Back 10

the increase in the quantity of output when you increase the quantity of that input by one unit.

Front 11

A fixed cost is a

Back 11

cost that does not depend on the quantity of output produced.

Front 12

A variable cost is a

Back 12

cost that depends on the quantity of output produced.

Front 13

The total cost is

Back 13

the sum of the fixed cost and the variable cost of producing that quantity of output. TC = FC + VC. Due to diminishing returns, the total cost curve becomes steeper as more output is produced.

Front 14

The marginal cost of producing a good is

Back 14

the additional cost incurred by producing one more unit. As in the case of marginal product, marginal cost is equal to the increase in total cost divided by the increase in the quantity of output.

Front 15

Why Is the Marginal Cost Curve Upward Sloping?

Back 15

Itslopes upward because there are diminishing returns to inputs. As outputincreases, the marginal product of the variable input declines. Thisimplies that more and more of the variable input must be used to produce eachadditional unit of output as the amount of output already produced rises. Andbecause each unit of the variable input must be paid for, the cost peradditional unit of output also rises.

Front 16

Average total cost (ATC), often referred to simply as average cost, is

Back 16

total cost divided by quantity of output produced.

Front 17

Average fixed cost is

Back 17

the fixed cost per unit of output.

Front 18

Average variable cost is

Back 18

the variable cost per unit of output.

Front 19

Increasing output has two opposingeffects on average total cost—

Back 19

the “spreading effect” and the “diminishing returns effect”:

Front 20

The spreading effect:

Back 20

The larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower the average fixed cost.

Front 21

The diminishing returns effect:

Back 21

The larger the output, the greater the amount of variable input required to produce additional units leading to higher average variable cost.

Front 22

Marginal cost curve is

Back 22

upward sloping due to diminishing returns.

Front 23

Average variable cost curve is

Back 23

also upward sloping but is flatter than the marginal cost curve.

Front 24

Average fixed cost curve is

Back 24

downward sloping because of the spreading effect.

Front 25

The marginal cost curve

Back 25

intersects the average total cost curve from below, crossing it at its lowest point

Front 26

The minimum-cost output is

Back 26

the quantity of output at which average total cost is lowest—the bottom of the U-shaped average total cost curve. At the minimum-cost output, average total cost is equal to marginal cost. At output less than the minimum-cost output, marginal cost is less than average total cost and average total cost is falling. At output greater than the minimum-cost output, marginal cost is greater than average total cost and average total cost is rising.

Front 27

In the short run:

Back 27

Fixed cost is completely outside the control of a firm.

Front 28

In the long run:

Back 28

All inputs are variable. In the long run a firm’s fixed cost becomes a variable it can choose. The firm will choose its fixed cost in the long run based on the level of output it expects to produce.

Front 29

The long-run average total cost curve shows

Back 29

the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output. To get the long-run ATC, draw a line connecting the minimum points of the short-run ATC curves.

Front 30

There are increasing returns to scale (economies of scale) when

Back 30

long-run average total cost declines as output increases.

Front 31

There are decreasing returns to scale (diseconomies of scale) when

Back 31

long-run average total cost increases as output increases.

Front 32

There are constant returns to scale when

Back 32

long-run average total cost is constant as output increases.

Front 33

Network externalities occur when

Back 33

the value of a good to an individual is greater when a large number of other people also use that good.