Question

Explain the firm’s behavior in general based on a rigorous model which we have constructed so far through this course (2 pages: 25 points) "the firm" in economics is referring to the theory of the firm this question asks to explain the behavior of the firm to include the following concepts:

Production Function, Isocost lines, Isoquants, adjustment of capital, Long run, Short run, total product of labor, average product of labor, marginal product of labor, marginal product of capital, ,marginal rate of technical substitution, upper ridge line, lower ridge line, cost minimizing point (input combination), long-run expansion path, short-run expansion path, total cost curve, total variable cost curve, fixed cost, short run average cost curve, average variable cost curve, short run marginal cost curve, long run total cost curve, long run marginal cost curve, long run average cost curve, market price of commodity, total revenue, total profit, marginal profit, profit maximizing price and quantity, demand curve of perfect competitive firm in the short run/long run, abnormal profit, entry of other competitors for abnormal profit, demand curve and marginal revenue curve to monopolist, monopoly price and output

Answer 1

Production Function- It is function of labour and capital which are used to produce a given amount of output. It is represented by F(K,L) where K is amount of capital and L is amount of labour used to produce a given amount of output.

Iso cost lines- Iso cost lines are the combination of inputs used that is labour and capital to produce a given amount of output by a producer. It is same like a budget line. It shows the capacity or the willingness of a producer to produce an output at a given cost.

Isoquants-An isoquant is a curve which same like an indifference curve. It is a curve which shows that different combination of inputs can be used to produce the same level of output.

Adjustment of capital-

Long Run- Long run is a period in economics in which all factors are variable. It means the four factors of production land, labour, capital and enterpreneur are variable. A firm can change the amount of factor of production used and also can change its cost.

Short Run- Short run is a period in economics in which all factors of production , wages and cost are not flexible. In short run only labour and capital can be change. A producer cannot change the scale of production.

Total Product of Labour-It is the quantity of output a labor can produce by using inputs and his capacity in a given period of time.

Average product of labour- It is defined as the total product of labor divided by number of labor employed. It can be calculated as Q/L.

Marginal product of labor- It is defined as change in total production due to change in the number of labor employed holding other factors of production constant.It can be calculated as where is change in output and is change in labor.

Marginal product of capital- It is defined as change in total production or output due to change in the number of capital used holding other factors of production constant. It can be calculated as where is change in total output and is change in capital.

Marginal Rate of technical substitution-It is the rate at which the quantity of one input has to be decreased to increase the quantity of another input so that output remains constant.

Upper ridge line- Ridge line is the locus of points of isoquants. Upper ridge line means marginal product of capital is zero.

Lower ridge line- Lower ridge line means marginal product of labour is zero.