Econ 12 - Cite as: Chia-Hui Chen, course materials for...

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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 ecient. 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...

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