Econ 12

# Econ 12 - Cite as Chia-Hui Chen course materials for 14.01...

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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Returns to Scale 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 3, 2007 Lecture 12 Production Functions and Cost of Production Outline 1. Chap 6: Returns to Scale 2. Chap 6: Production Function Derivation 3. Chap 7: Cost of Production 1 Returns to Scale Increasing Returns to Scale (Lecture 11) Constant Returns to Scale • Doubling the inputs leads to double the output: Q (2 K, 2 L ) = 2 Q ( K, L ) . • One big firm is as good as many small firms. • Isoquants are equally distant apart (see Figure 1). Decreasing Returns to Scale • Doubling the inputs leads to an output less than twice the original output: Q (2 K, 2 L ) < 2 Q ( K, L ) . • Small firms are more eﬃcient. • Isoquants become further apart (see Figure 2). 2 12 10 k 8 6 Q=3 4 Q=2 2 Q=1 0 1 2 3 4 5 6 7 8 9 L k 10 9 8 7 6 5 Q=3 4 3 2 Q=2 1 Q=1 0 1 2 3 4 5 6 7 8 9 L 10 1 Returns to Scale Figure 1: Isoquant Curves, Constant Returns to Scale....
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Econ 12 - Cite as Chia-Hui Chen course materials for 14.01...

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