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Econ 281 Chapter7b

# Econ 281 Chapter7b - Comparative Statistics The isocost...

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1 Comparative Statistics The isocost line depends upon input prices and desired output Any change in input prices or output will shift the isocost line This shift will cause changes in the optimal choice of inputs

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2 1. A change in the relative price of inputs  changes the  slope  of the isocost line. All else equal, an increase in w must decrease  the cost minimizing quantity of labor and  increase the cost minimizing quantity of capital  with diminishing MRTS L,K . All else equal, an increase in r must decrease  the cost minimizing quantity of capital and  increase the cost minimizing quantity of labor.
3 Example:   Change in Relative Prices of Inputs L K Isoquant Q = Q 0 Cost minimizing input combination, w=1 r=1 Cost minimizing input combination w=2, r=1 0

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4 Originally, MicroCorp faced input prices of \$10 for both labor and capital. MicroCorp has a contract with its parent company, Econosoft, to produce 100 units a day through the production function: Q=2(LK) 1/2 MP L =(K/L) 1/2 MP K =(L/K) 1/2 If the price of labour increased to \$40, calculate the effect on capital and labour.
5 L K K L L K r w = = = 10 10 / / MP MP : Originally K L L K K KK Q KL Q = = = = = 50 50 2 100 2 2

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6 L K K L L K r w 4 10 40 / / MP MP : Change After K L = = = K L L LL Q KL Q = = = = = 100 25 4 100 4 2 2
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