1. What is the marginal product of labor (MP or MPP)? Why is the curve shaped the way it is?
2. Explain and describe each of the four production relationships.
3. Indicate whether each of the following are long-run or short-run choices. Explain why.
a. A law partnership signs a 5 year lease for an office complex.
b. A jeans company asks its assembly-line workers to work an extra shift this week.
c. A local oil refinery plans a complete restructuring of its production process, including relocating the plant.
d. The local college decides to offer an extra section of micro-economics this summer.
e. A farmer increases the quantity of water applied to his fields.
f. The university hires a new football coach on a three year contract.
g. The corner hot dog vender decides to buy an additional cart.
4. In what two ways can “returns to scale” be used. Give an example of each way.


1. What happens to the difference between average total cost and average variable cost as a firm’s output expands? Explain.
2. How would each of the following affect average total cost (ATC), average variable cost (AVC) and marginal cost?
a. an increase in the cost of the lease of the firm’s building
b. a reduction in the price of electricity
c. a reduction in wages paid to assembly line workers
d. an increase in the salary of the president of the firm
e. a reduction in the price of tags used to label the firm’s product
3. Suppose a firm is producing 1,000 units of output. Its average fixed costs are $100. Its average variable costs are $50. What is the total cost of producing 1000 units of output?
4. “There are no fixed costs in the long run.” True or false? Explain.
5. Suppose a firm is operating at the minimum point of its short-run ATC curve, so that MC=ATC. Under what circumstances would it choose to alter the size the size of its plant? Explain.
6. For which of the following types of firms would you expect diseconomies of scale (decreasing returns) to set in at relatively low levels of output? Why?
a. a copy shop
b. a hardware store
c. a dairy
d. an automobile manufacturer
e. a vodka manufacturer
f. a newspaper
g. a toy store

M-7; D-1: Production Theory and Studying
Explain and discuss how you think studying for an exam is subject to the Law of Diminishing Returns. You might also throw into the discussion how this relates to opportunity cost and economic choice (marginal cost versus marginal benefit) of how you choose to spend your time.

Matching Exercise – Costs of Production


1. Implicit Cost
2. Normal Profit
3. Factor substitution
4. Explicit Cost
5. Alternative cost
6. Decreasing Returns to Scale
7. Envelope Curve
8. MC=MR rule
9. Marginal Cost
10. Economic profit
11. Profit maximization in the short run
12. Total fixed costs
13. Constant costs industry
14. Stage II
15. Production function
16. Shutdown point
17. Variable input
18. Marginal Revenue
19. Sunk Cost
20. Variable Costs

a. The area in which every firm will produce.
b. Another name for the long run average total cost curve.
c. The cost of self-owned, self-utilized resources
d. The profits necessary to ensure that a firm stays in business. Considered by economists to be part of implicit costs.
e. The change in total cost associated with a one unit change in output.
f. Inputs that rise and fall with the quantity of output.
g. The substituting of one input for another to produce a given level of output.
h. The addition to total revenue from selling one more unit of the product
i. The ordinary expenses of the firm that accountants include, such as payroll costs and payments for raw materials. Accounting Costs
j. A cost that has been incurred and cannot be recovered
k. Costs of the fixed inputs such as rent. Does not change with changes in output. Also called overhead costs.
l. The costs resulting from variable inputs.
m. The rule a firm should follow to find the profit maximizing quantity.
n. The production relationship that would lead to increasing costs.
o. The value of what particular resources could have produced had they been used in the best alternative way; opportunity cost.
p. An industry with a horizontal long run supply curve; its expansion does not result in an increase or decrease in input prices.
q. The difference between total cost and total revenue.
r. The relationship between the inputs used in production and the level of output.
s. Considered to be the goal of every firm.
t. The minimum point on the AVC. The lowest price at which the firm will produce.

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1. What is the marginal product of labor (MP or MPP)? Why is the curve shaped the way it is?

The marginal product of labor is the amount of output produced by additional one unit of labor, which could refer to one worker or one hour of working hours. The marginal product of labor usually follows an increasing path as more labor is utilized. At first stage, it goes up at an increasing rate meaning that one additional labor makes a big contribution to the quantity of output the firm can produce. This phase is often described by the underutilized capital that is finally used by workers. At the second stage, the rate of increase for output declines even if each additional work is employed. This phase is often illustrated as the capital has been used by additional workers normally. In the last stage, additional labors may hinder the production of the output, and the marginal product of labor declines. This phase is portrayed by too many workers interfere and interrupt each other ending up with the very inefficient operation to produce output.

2. Explain and describe each of the four production relationships.

The first factor of production is land or natural resources. Those are provided by the nature. The land does not get produced or manufactured, and natural resources like water, oil, metals are not invented. The income earned from land or such natural resources by the owner is called rent.

The second factor of production is a labor. It is essentially any human input. The productivity of the human input depends on her knowledge, education, and motivation. Human input of high skilled will usually produce more output than lower skilled labor. The income earned by labor resources is called wages as it is a return from hours worker devote in exchange of their leisure....
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