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Chapter 8 notes

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Kalina Staub

ECO100: Chapter 8 Notes-Producers in the Long Run Allocative vs. technical efficiency: allocative efficiency means that the marginal cost of each good produced is equal to its _____________________. Technical efficiency means that a given number of inputs are combined in such a way as to maximize the level of output (e.g. costly resources are not under-utilized or wasted) We said before that the goal of firms is to_______________________, however, in order to do this, firms must choose between multiple technically efficient combinations of labor and capital to produce a given level of output at the ______________ cost. (If a firm is not __________________, then they are by definition NOT __________________________). ___________________________ is necessary for a firm to ___________________ profits. Long-run cost minimization condition: OR The firm wants to get the same _______________________ out of each input, otherwise it could reallocate its spending and produce a higher quantity or produce the same level of output at a lower cost. The Principle of Substitution: Methods of production will change as _____________________ of inputs change. Firms will use relatively _________________ of the cheaper input and relatively ___________ of the more expensive input. Minute Paper-take out a sheet of paper, put your first name, last name, and student ID number on the sheet of paper and answer the following. Assume a mechanized plow costs $10/hour to operate and can plow 1 acre per hour in all countries. Now assume that in Country A, labor costs $2/hour and a man or woman can plow ¼ acre per hour; whereas, in Country B, labor costs $15/hour and a man or woman can also plow ¼ acre per hour. How will the cost minimizing input choices differ between Countries A and B assuming that a firm wants to plow 5 acres per hour? Long-Run Average Cost Curve (LRAC): the curve showing the lowest possible cost of producing each level of output when all inputs are __________________. Thus it is the boundary between cost levels that are __________________ and those that are _________________ at a given le
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