File Name: theory of production and cost questions and answers .zip
Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing? If the average variable cost is increasing decreasing , then the last unit produced is adding more less to total variable cost than the previous units did, on average.
- Production function
- Theory of Production
- Economics Multiple Choice Questions – Chapter 3 – Theory of Production
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In economics , a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define marginal product and to distinguish allocative efficiency , a key focus of economics. One important purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors, while abstracting away from the technological problems of achieving technical efficiency, as an engineer or professional manager might understand it.
Complete the table by calculating the Total Product of Labor total output of the firm and Marginal Product of Labor corresponding to each number of workers. See the table. At which worker does the Law of Diminishing Marginal Returns start working? How do you know? As we can see from the table, it happens when the firm hires the fourth worker an alternative answer - "after the firm hires the third worker"; phrasing it either way is fine. Using the Greasy Wrench example, explain why every firm, as it hires more people in an attempt to increase its output, will sooner or later hit the range of diminishing marginal returns.
Law of DMR is present only in the short run, when some of the firm's inputs are fixed. Greasy Wrench has limited space and probably fixed amount of equipment. As a result, as more workers are hired, there will eventually be shortage of space, or equipment, to work with.
The capital-labor ratio will no longer be optimal, and the increase in the output attributed to an additional worker starts to decrease. When Mr. Wei's son looked at the table, he said to his dad: "Hiring 5th and 6th person makes no sense! The fifth worker does not add as much to the output as the fourth worker does.
However, this does not necessarily mean that hiring him is a bad idea. Once again, everything will depend on how much a worker costs and what is the dollar value of his marginal product. So Mr. Wei Junior may be wrong. Determine the average labor cost of repairing a car. That is our total labor cost. To determine the average cost, we need to divide total cost by the number of cars fixed.
With three workers employed, 30 cars are fixed daily. No output - no variable cost. If the firm decides to increase its output from 6 to 7 units, by how much will its total cost increase?
One way is to calculate the total cost of 6 units and of 7 units following any of the procedures in part c and then find the difference. Imagine a firm using only one variable input. When the Marginal Product of using every next unit of this input is decreasing, the Marginal Cost MC of every next unit of output will be necessarily increasing.
Since the price of input is constant, a decrease in MP will cause MC to increase. Which of the following will cause the average fixed cost curve of making cigarettes to shift? True or False? The short run is the time period in which the level of output is fixed.
In the short run, some inputs are fixed while some are variable. A change in the amount of variable inputs used will cause the output to increase.
Another way to look at it is: if everything is fixed and we cannot change it, why worry about it and study it? The "Greasy Wrench" shop specializing in auto repairs rents a building at the corner of 77th and Moonawalker.
In the short run, it can vary its output the number of cars fixed only by varying the number of mechanics it employs. Each Greasy Wrench employee is paid a fixed wage. Over the years, Wu Wei, the owner of "Greasy Wrench", has tried hiring different numbers of workers. The data about the average productivity of each worker also known as the Average Product of Labor for each number of workers are given in the table below.
Theory of Production
In economics, production theory explains the principles in which the business has to take decisions on how much of each commodity it sells and how much it produces and also how much of raw material ie. It defines the relationships between the prices of the commodities and productive factors on one hand and the quantities of these commodities and productive factors that are produced on the other hand. Production is a process of combining various inputs to produce an output for consumption. It is the act of creating output in the form of a commodity or a service which contributes to the utility of individuals. The Production function signifies a technical relationship between the physical inputs and physical outputs of the firm, for a given state of the technology.
Economics Multiple Choice Questions – Chapter 3 – Theory of Production
Each business, regardless of size or complexity, tries to earn a profit:. Total revenue is the income the firm generates from selling its products. We calculate it by multiplying the price of the product times the quantity of output sold:.
Everything has a cost, and that is true for firms as well as consumers. When firms produce goods, they incur costs that vary depending on how much they are producing. In this lecture, we will analyze firms' cost functions. Building factory infrastructure is a producer cost.
Read this article to learn about the most frequently asked questions on the Theory of Production. AP is the total product per unit of a variable input. MP is the change in total product consequent upon a change in variable input.
What is a firm?
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