1 Firms, Production, and Costs Free Online FlashCards

What does a production function describe?

A production function describes the greatest output a firm can produce from given quantities of inputs with its available technology.

How do the short run and long run differ?

In the short run, at least one input is fixed; in the long run, the firm can vary all inputs. These terms describe input flexibility, not a specific duration.

How do explicit and implicit costs differ?

Explicit costs are direct payments, such as wages or rent. Implicit costs are the opportunity costs of resources the firm already owns.

What makes a cost sunk rather than merely fixed?

A fixed cost is not necessarily sunk. A cost is sunk only if it cannot be recovered or avoided.

How do economies, constant returns, and diseconomies of scale differ?

Economies of scale occur when long-run average cost falls as output expands; constant returns to scale when it stays about the same; diseconomies of scale when it rises.

What is the general rule for choosing profit-maximizing output?

An interior profit-maximizing output occurs where marginal revenue equals marginal cost, with MC rising through MR. Produce another unit if its extra revenue exceeds its extra cost.

How are total cost, fixed cost, and variable cost related?

Total cost is the sum of fixed cost and variable cost: $TC = FC + VC$.

When should a competitive firm shut down in the short run?

In perfect competition, a firm shuts down in the short run when price is below average variable cost, $P < AVC$. At $P = AVC$, it is indifferent between producing and shutting down in the basic model.

How does a short-run shutdown differ from long-run exit?

A shutdown temporarily stops production while the firm remains in the industry; exit is a long-run decision to leave the industry after adjusting all inputs.

Why is a monopolist’s marginal revenue generally below its price?

A monopolist generally has marginal revenue below price because selling more usually requires lowering the price, including on units it could have sold at a higher price.

What is the marginal product of an input?

Marginal product is the additional output produced by using one more unit of an input while holding other inputs fixed.

What is the law of diminishing marginal returns?

The law of diminishing marginal returns states that marginal product may eventually decline when more of a variable input is combined with a fixed input.