ECON 2100 Lecture Notes - Lecture 8: Production Function, Diminishing Returns, Perfect Competition
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8 May 2016
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In a case where a farm has fixed machinery in the short term, there is only one input (labor) and one output (corn). The production function is a mathematical description of how the firm can transform inputs into outputs, given technological constraints. Market constraints are constraints on the prices and quantities of the inputs the firm uses and sells. The quantity of output is y; and the quantity of input is x. The production function y= f(x) is the maximum output y that the firm can produce if it uses x units of the input. This is also known as the u-shaped average cost curve or the real world assumption: f(0)=0. Market constraints mean that we operate in perfectly competitive markets. W represents wage rate and p represents output price. Profit is the difference between revenue and cost it is denoted as . Py (x) is another way of writing revenue.
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The law of eventually diminishing marginal returns: (Points : 1)
a. states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns.
b. is a mathematical theorem that can be logically proved or disproved
c. is the rate at which one input may be substituted for another input in the production process
d. None of the above
b. the incremental change in total output that can be produced by the use of one more unit of the variable input in the production process c. the percentage change in output resulting from a given percentage change in the amount of the variable input X employed in the production process with Y d. None of the above |
b. the marginal rate of technical substitution c. equal to MPx/MPy d. all of the above e. none of the above |
b. equal to the marginal factor cost of the variable factor times the marginal revenue resulting from the increase in output obtained c. equal to the marginal product of the variable factor times the marginal product resulting from the increase in output obtained d. a and b e. a and c |
b. variable cost c. marginal rate of technical substitution d. total cost e. none of the above |
b. the average product of labor (L) is equal to ?2 c. if the amount of labor input (L) is increased by 1 percent, then output will increase by ?1 percent d. a and b e. a and c |
b. relevant to decisions in which one or more inputs to the production process are fixed c. not relevant to optimal pricing and production output decision facilities d. crucial in making optimal investment decisions in new production facilities e. none of the above |
b. all inputs are considered variable c. some inputs are always fixed d. capital and labor are always combined in fixed proportions |
A linear total cost function implies that: (Points : 1) |
b. average total costs are continually decreasing as output increases
c. a and b
d. none of the above