Reference no: EM13894537

a) Consumer theory is similar to that part of producer theory that deals with long-run production.

· In consumer theory, consumers are assumed to be utility-maximizers. This corresponds to the assumption in producer theory that producers are profit- maximizers.

· In consumer theory, consumers are limited because of prices and income. Correspondingly, producers are limited by the prices of the input factors (wages and rental rates for capital) and costs.

· In consumer theory, the consumer has indifference curves that indicate her utility of certain combinations of goods. Correspondingly, producers have isoquants that indicate the maximum production of certain combinations of inputs.

b) A production function is a mathematical expression that describes how large the production will be if one uses different combinations of the input factors. Usually, labor, L, and capital, K, are variables in the production function:

 q = f (L, K )

Sometimes, a variable for technology is also used in the production function.

c) There are often input factors that are not possible to vary immediately. For example, a factory could be of a certain size and not possible to sell or increase quickly. The short run is then defined as the period during which it is impossible to change those input factors. Often, one assumes that capital is not possible to vary in the short run but that labor is fully variable.

Long run is then defined as the period when all input factors are variable.

d) Returns to scale are about the relation between the size of a firm and its production. If you have a firm of a certain size and then increase all its inputs by the same factor, will then the total output also increase by the same factor.

If the answer is yes, we have constant returns to scale. If the answer is that the production increases more, we have increasing returns to scale. In the third case, we have decreasing returns to scale.