ECON_CH 7 & 8

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Questions and Answers

What is the primary factor that determines the productivity of labor?

The level of technology used

The amount of capital invested (correct)

The number of workers employed

The quantity of output produced

Which of the following technologies is most labor-intensive?

Technology C

Technology B

Technology A (correct)

Technology E

According to the law of diminishing returns, what happens to the marginal product of labor as the quantity of labor increases?

It increases at a decreasing rate (correct)

It decreases at a decreasing rate

It increases at an increasing rate

It remains constant

What is the primary determinant of the cost-minimizing choice among alternative technologies?

The input prices Signup and view all the answers

If the price of labor (P sub L) increases, which technology would be most affected?

Technology A Signup and view all the answers

What is the result of accumulating capital at a high rate, as seen in China's growth?

Increase in the average quantity of output per worker Signup and view all the answers

What is the primary focus of determining the optimal method of production?

Minimizing cost for a given level of output Signup and view all the answers

A capital-intensive technology is characterized by:

High capital costs and low labor costs Signup and view all the answers

What is the numerical or mathematical expression of a relationship between inputs and outputs?

Production function or total product function Signup and view all the answers

The law of diminishing returns is most closely related to:

The marginal product of an input Signup and view all the answers

A labor-intensive technology is characterized by:

High labor costs and low capital costs Signup and view all the answers

What is the term for the quantitative relationship between inputs and outputs?

Production technology Signup and view all the answers

What is the relationship between the marginal product and average product of labor?

If marginal product is above average product, the average rises. Signup and view all the answers

What is the marginal product of labor when the number of employees is 4?

5 Signup and view all the answers

According to the data in Table 7.2, what is the average product of labor when the number of employees is 3?

11.7 Signup and view all the answers

What is the characteristic of capital-intensive technology?

It uses a low amount of labor and high amount of capital. Signup and view all the answers

What happens to the marginal product of labor as the quantity of labor increases, according to the law of diminishing returns?

The marginal product of labor decreases. Signup and view all the answers

What is the main difference between labor-intensive technology and capital-intensive technology?

The type of input used Signup and view all the answers

What is the relationship between total product and marginal product of labor?

Total product is the sum of marginal products. Signup and view all the answers

What is the law of diminishing returns?

The law that states that marginal product of a variable input declines after a certain point Signup and view all the answers

Why are capital and labor considered complementary inputs?

Because they work together in production. Signup and view all the answers

What is the total product when the number of employees is 2?

25 Signup and view all the answers

What is the point of intersection between the marginal product and average product curves?

The point of maximum average product. Signup and view all the answers

When does the law of diminishing returns apply?

Always in the short run Signup and view all the answers

What is the result of increasing the quantity of labor, while holding capital constant?

The marginal product of labor decreases. Signup and view all the answers

What does the total variable cost curve express?

The relationship between TVC and total output Signup and view all the answers

What is the formula used to derive total variable cost in Table 8.2?

TVC = (K × Pk) + (L × PL) Signup and view all the answers

What is the purpose of Table 8.2?

To derive total variable cost from production requirements and input prices Signup and view all the answers

What is shown in Figure 8.3?

The total variable cost curve Signup and view all the answers

What is the main factor that determines the total variable cost of a firm?

The input prices Signup and view all the answers

What is the relationship between the total variable cost and the level of output?

The total variable cost increases as the level of output increases Signup and view all the answers

What is a necessary component for a firm to calculate its costs of production?

The quantity of inputs needed Signup and view all the answers

What is the term for costs that are incurred even if the firm is producing nothing?

Fixed costs Signup and view all the answers

What is the formula for total cost (TC)?

TC = TFC + TVC Signup and view all the answers

What is the primary objective of firms in making production decisions?

Maximizing profits Signup and view all the answers

What is the term for the total of all costs that do not change with output even if output is zero?

Total fixed costs Signup and view all the answers

What is the term for a cost that depends on the level of production chosen?

Variable cost Signup and view all the answers

When marginal cost is above average cost, what is the trend of average cost?

Increasing Signup and view all the answers

What is the relationship between the total cost curve and the total variable cost curve?

They have the same shape but are shifted by the amount of TFC Signup and view all the answers

What is the formula for calculating Average Total Cost (ATC)?

ATC = TC / q Signup and view all the answers

What is the trend of average fixed cost as output increases?

It decreases Signup and view all the answers

What is the relationship between average variable cost and marginal cost at the minimum point of AVC?

Marginal cost is equal to average variable cost Signup and view all the answers

What is the formula for calculating Average Total Cost (ATC) in terms of average variable cost and average fixed cost?

ATC = AVC + AFC Signup and view all the answers

What is the relationship between the average total cost and the marginal cost?

MC intersects ATC at ATC's minimum point. Signup and view all the answers

What is the definition of total cost (TC)?

The total economic cost of all the inputs used by a firm in production. Signup and view all the answers

What is the equation for total cost (TC)?

TC = TFC + TVC Signup and view all the answers

What is the definition of economic costs?

Costs that include the full opportunity costs of all inputs. Signup and view all the answers

What is the relationship between the average variable cost (AVC) and the marginal cost (MC)?

MC intersects AVC at AVC's minimum point. Signup and view all the answers

What is the definition of total fixed costs (TFC)?

Costs that do not depend on the quantity of output produced. Signup and view all the answers

What does the marginal cost curve show?

How total variable cost changes with single-unit increases in total output Signup and view all the answers

What is the formula for calculating the average variable cost (AVC)?

TVC/q Signup and view all the answers

What does the term 'q' represent in the formula for calculating the average variable cost (AVC)?

Number of units of output Signup and view all the answers

What is the relationship between total variable cost and marginal cost?

Marginal cost is the change in total variable cost Signup and view all the answers

What is the total fixed cost (TFC) in the short-run cost schedule of the hypothetical firm?

$100.00 Signup and view all the answers

What is the average fixed cost (AFC) when the number of units of output (q) is 4?

$33.33 Signup and view all the answers

Study Notes

Capital and Productivity

Additional capital increases the productivity of labor, meaning the amount of output produced per worker per hour.
Building new, modern plants and equipment enhances a nation's productivity.
China's high rate of capital accumulation in the past decade has resulted in growth in the average quantity of output per worker.

Production Functions

A production function is a numerical or mathematical expression of the relationship between inputs and outputs.
It shows units of total product as a function of units of inputs.
A production function can be represented graphically, with total product on the vertical axis and units of labor on the horizontal axis.

Marginal Product and Average Product

Marginal product is the additional output that can be produced by adding one more unit of a specific input, ceteris paribus.
The law of diminishing returns states that when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines.
Average product is the average amount produced by each unit of a variable factor of production.
If marginal product is above average product, the average rises; if marginal product is below average product, the average falls.

Choice of Technology

Two things determine the cost of production: (1) technologies that are available and (2) input prices.
The optimal method of production is the production method that minimizes cost for a given level of output.
The cost of production is determined by the market price of output, production techniques, and input prices.

Labor-Intensive and Capital-Intensive Technologies

Labor-intensive technology relies heavily on human labor instead of capital.
Capital-intensive technology relies heavily on capital instead of human labor.
The choice of technology depends on the relative prices of labor and capital.

Short-Run Costs and Output Decisions

A firm's production decisions involve three specific decisions:
- How much to produce
- How to produce it
- At what price to sell it

Costs in the Short Run

Fixed cost: a cost that does not depend on the firm's level of output
Variable cost: a cost that depends on the level of production chosen
Total cost (TC): total fixed costs plus total variable costs (TC = TFC + TVC)

Fixed Costs

Total fixed costs (TFC) or overhead: the total of all costs that do not change with output, even if output is zero
Total fixed costs are incurred even if the firm is producing nothing

Variable Costs

Total variable cost curve: a graph that shows the relationship between total variable cost and the level of a firm's output
Average variable cost (AVC): total variable cost divided by the number of units of output (AVC = TVC/q)
Marginal cost (MC): the cost of producing each additional unit
The marginal cost curve shows how total variable cost changes with single-unit increases in total output

Total Costs

Total cost (TC): the total economic cost of all the inputs used by a firm in production (TC = TFC + TVC)
Average total cost (ATC): total cost divided by the number of units of output (ATC = TC/q)
The relationship between ATC and MC is the same as the relationship between AVC and MC
- If MC is below ATC, ATC will decline toward MC
- If MC is above ATC, ATC will increase
- MC intersects ATC at ATC's minimum point for the same reason that it intersects the AVC curve at its minimum point

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Description

Understanding the relationship between capital and productivity at national and international levels, and how building modern plants and equipment enhances a nation's productivity.