Lecture16 - Announcements HW6 is due the Monday after...

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nnouncements Announcements HW6 is due the Monday after break. There IS class on Friday. 1of31
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THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS Recall the three decisions a firm has to make: 1. How much 2. Which production 3. How much of ou c output to supply c p oduct o technology to use c o each input to demand The Three Decisions That All Firms Must Make 2of33
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Alternative Technologies There are many ways to produce the same level of output using different combinations of capital equipment and labor. Example: There are multiple ways to get your car ashed: the automated car washes (very K washed: the automated car washes (very K intensive), OR, you could get it washed by a bunch of 14 year olds at a charity car wash (very labor intensive). Either way the car gets washed, but there are different amounts of capital and labor employed. What determines how these inputs will be used to make a particular product? Normally the relative cost of each input. 3of33
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Textbooks Example: Suppose there are 2 ways to produce 10,000 Economics Textbooks: Method 1: 1 Computerized Press, 1 operator Method 2: 100 Manual Presses, 100 Operators The job of the engineer is to provide these options to management. The engineer cannot choose which method to use…that’s t’ jb H ld t management’s job. How would management decide? Management would need to examine e market nerated prices for each input. the market generated prices for each input. 4of33
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xtbooks Textbooks Suppose: perator salary = 30 000 each Operator salary 30,000 each Lease of a computerized press = $400,000 each Lease of manual press = $10,000 each Then: Cost of method 1 = $400k+30k=$430,000 Cost of method 2 = ($30k+$10k)*100=$4,000,000 Now management can choose a method based on sts(obviously they’ll go with #1) costs(obviously, they ll go with #1) 5of33
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THE PRODUCTION PROCESS NOTE: While we talk about using capital OR labor, in reality additional capital increases the productivity of labor. Because capital—buildings, machines, and so on—is of no use without people to operate it, we sometimes say that capital and labor are complementary inputs . (Other inputs can be substitutes for each other. If you are making a desk, you can use metal OR wood ese are ubstitute inputs) these are substitute inputs) 6of33
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CHOICE OF TECHNOLOGY Another example: consider five technologies to make “widgets” Inputs Required to Produce 100 Widgets Using Alternative Technologies NITS OF NITS OF TECHNOLOGY UNITS OF CAPITAL ( K ) UNITS OF LABOR ( L ) A B 2 3 10 6 C D E 4 6 10 4 3 2 7of33
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CHOICE OF TECHNOLOGY ost- inimizing hoice Among Alternative Technologies (100 Diapers) In order to determine which technology is best (lowest cost) we need to know how much the inputs cost. Cost Minimizing Choice Among Alternative Technologies (100 Diapers) (4) (5) (1) (2) UNITS OF (3) UNITS OF Cost = ( L x P L ) + ( K x P K ) = $1 = $5 TECHNOLOGY CAPITAL ( K ) LABOR ( L ) P L $1 P K = $1 P L $5 P K = $1 A 2 10 $12 $52 B C D E 3 4 6 10 6 4 3 2 9 8 9 12 33 24 21 20 Two things determine the cost of production: (1) technologies that are vailable and (2) input prices Profit
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This note was uploaded on 03/18/2008 for the course ECON 2005 taught by Professor Zirkle during the Spring '07 term at Virginia Tech.

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Lecture16 - Announcements HW6 is due the Monday after...

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