Econ 281 Chapter6b - 1 Isoquants Regions of Production Due...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 Isoquants Regions of Production Due to the law of diminishing marginal returns, increasing one input will eventually decrease total output When this occurs, in order to maintain a level of output (stay on the same isoquant), the other input will have to increase This type of production is not economical, and results in backward-bending and upward sloping sections of the isoquant: 2 Example: The Economic and the Uneconomic Regions of Production L K Q = 10 Q = 20 MP K < 0 MP L < 0 Isoquants Uneconomic region Economic region 3 Isoquants and Substitution Different industries have different production functions resulting in different substitution possibilities: Ie: In mowing lawns, hard to substitute away from lawn mowers In general, it is easier to substitute away from an input when it is abundant This is shown on the isoquant curve 4 MRTS L,K is high; labour is scarce so capital is easily substituted for labour K L MRTS L,K is low; labour is abundant so capital is not easily substituted for labour 5 When input substitution is easy, isoquants are nearly straight lines K L When input substitution is hard, isoquants are more L-shaped 55 100 170 130 100 6 Elasticity of Substitution measures how easily a firm can substitute labor for capital (K/L) MRTS x ) / ( % ) ( % MRTS % Ratio Labour - Capital % , K L, MRTS L K MRTS L K K L = = = 7 Example: Suppose that MRTS A L,K = 4, K A /L A = 4 MRTS B L,K = 1, K B /L B = 1 MRTS L,K = MRTS B L,K - MRTS A L,K = -3 = [ (K/L)/ MRTS L,K ]x [av.MRTS L,K /av.(K/L)] = (-3/-3)(2.5/2.5) = 1 8...
View Full Document

Page1 / 30

Econ 281 Chapter6b - 1 Isoquants Regions of Production Due...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online