Unit 3:

Question 1

What is the production function?

Answer 1

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

Question 2

What are the two types of inputs?

Answer 2

Fixed inputs and variable inputs.

Question 3

What is a fixed input?

Answer 3

An input that is fixed for a period of time and cannot be changed.

Question 4

Examples of fixed inputs

Answer 4

Land, labor (in short run), capital, entrepreneurship.

Question 5

What is a variable input?

Answer 5

An input that can be changed by the company at any time.

Question 6

Examples of variable inputs

Answer 6

Cars, houses, food, goods, computers.

Question 7

What is the formula for marginal product of labor (MPL)?

Answer 7

MPL = ΔQ / ΔL or MPL = (Q₂ – Y
Q₁) / (L₂ – L₁).

Question 8

What does marginal product of labor measure?

Answer 8

The increase in quantity of output generated by one additional worker.

Question 9

What are diminishing returns to input?

Answer 9

When an increase in the quantity of an input (holding all others fixed) leads to a decline in that input’s marginal product.

Question 10

What does the downward slope in the MPL graph show?

Answer 10

The law of diminishing returns.

Question 11

What are fixed costs (FC)?

Answer 11

Costs that do not depend on the quantity of output produced (costs of fixed inputs).

Question 12

What are variable costs (VC)?

Answer 12

Costs that depend on the quantity of output produced (costs of variable inputs).

Question 13

What are total costs (TC)?

Answer 13

The sum of fixed and variable costs (TC = FC + VC).

Question 14

What is the total cost curve?

Answer 14

A curve that shows total cost depending on quantity of output.

Question 15

What are marginal costs (MC)?

Answer 15

The cost of producing one more unit of output; the change in total cost when one more unit is made.

Question 16

Formula for marginal cost

Answer 16

MC = ΔTC / ΔQ.

Question 17

What is average total cost (ATC)?

Answer 17

The average cost of producing each product; ATC = TC / Q of output.

Question 18

What is average fixed cost (AFC)?

Answer 18

The average fixed cost per unit of output; AFC = FC / Q of output.

Question 19

What is average variable cost (AVC)?

Answer 19

The average variable cost per unit of output; AVC = VC / Q of output.

Question 20

What does LRATC stand for?

Answer 20

Long-run average total cost curve.

Question 21

What does the LRATC curve show?

Answer 21

The relationship between output and ATC when fixed cost is chosen to minimize ATC for each level of output.

Question 22

What are economies of scale?

Answer 22

When long-run average total cost declines as output increases.

Question 23

What are diseconomies of scale?

Answer 23

When long-run average total cost increases as output increases.

Question 24

What are increasing returns to scale?

Answer 24

When output increases more than in proportion to an increase in all inputs.

Question 25

What are decreasing returns to scale?

Answer 25

When output increases less than in proportion to an increase in all inputs.

Question 26

What are constant returns to scale?

Answer 26

When output increases directly in proportion to an increase in all inputs.

Question 27

What is the formula for profit?

Answer 27

Profit (π) = Total Revenue (TR) - Total Cost (TC).

Question 28

What is the formula for total revenue?

Answer 28

TR = Price × Quantity (P × Q).

Question 29

What is the formula for average profit?

Answer 29

π / Q = AR - ATC.

Question 30

What is the formula for marginal profit?

Answer 30

ΔTR / ΔQ = MR - MC.

Question 31

What is total revenue?

Answer 31

Total amount of money a business brings in from the sale of its goods or services.

Question 32

What is profit?

Answer 32

Amount of money a business makes after paying for all production costs. Profit = TR - Total Cost.

Question 33

What is accounting profit?

Answer 33

Total revenue minus explicit costs.

Question 34

What is economic profit?

Answer 34

Total revenue minus both implicit and explicit costs.

Question 35

What is the difference between accounting and economic profit?

Answer 35

Accounting profit subtracts only explicit costs, while economic profit subtracts both explicit and implicit costs.

Question 36

What is the principle of marginal analysis?

Answer 36

Every activity should continue until marginal benefit equals marginal cost.

Question 37

What is marginal benefit?

Answer 37

Additional revenue from producing one more unit (also called marginal revenue).

Question 38

What is marginal cost?

Answer 38

Change in total cost divided by change in quantity (ΔTC / ΔQ).

Question 39

What is marginal revenue?

Answer 39

Change in total revenue divided by change in quantity (ΔTR / ΔQ).

Question 40

What is the PM (profit maximizing) rule?

Answer 40

Profit is maximized by producing the quantity of output at which MR of the last unit equals MC.

Question 41

What is net gain?

Answer 41

Marginal Revenue - Marginal Cost.

Question 42

What are the four market structures?

Answer 42

Perfect competition, monopolistic competition, oligopoly, monopoly.

Question 43

In perfect competition, how many producers are there?

Answer 43

Many producers (10,000–100,000 firms).

Question 44

What are barriers to entry like in perfect competition?

Answer 44

Easy entry, almost no barriers to entry.

Question 45

What type of products are in perfect competition?

Answer 45

Identical products with no differences.

Question 46

What price setting power do firms have in perfect competition?

Answer 46

No price control; firms are price takers.

Question 47

What does 'price taker' mean?

Answer 47

A firm that cannot influence market price; must accept the market price.

Question 48

What are the main characteristics of a perfectly competitive market?

Answer 48

Many producers, identical products, easy entry, and no price control.

Question 49

What does MR stand for?

Answer 49

Marginal Revenue (ΔTR / ΔQ).

Question 50

What does AR stand for?

Answer 50

Average Revenue (TR / Q).

Question 51

What does P stand for in perfect competition?

Answer 51

Price (same as MR and AR for price takers).

Question 52

What is the profit maximizing point?

Answer 52

The point where MR = MC.

Question 53

When MR > MC, what happens?

Answer 53

Profit keeps increasing.

Question 54

When MR = MC, what happens?

Answer 54

Profit reaches its peak (maximized).

Question 55

When MR < MC, what happens?

Answer 55

Profit decreases.

Question 56

Why is profit maximization important?

Answer 56

For a business to survive in perfect competition, it must be efficient and produce only up to the profit-maximizing point; going beyond is wasteful.