LEC4_factor_markets_post .pdf - Factor Markets II 2019 1 The new abnormal 2 Insurance costs dwarf Cal fire costs in 2017-2018 3 Who pays these costs 4

LEC4_factor_markets_post .pdf - Factor Markets II 2019 1...

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1 Factor Markets II 2019
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The new abnormal 2
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Insurance costs dwarf Cal fire costs in 2017-2018 3
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Who pays these costs? 4
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Inverse condemnation? In California, property owners can seek compensation for property damage when it is determined that the utility’s equipment is the cause of ignition, regardless of whether the utility was negligent or at fault. Insurance companies can use inverse condemnation to recover the claims payments they make to their policyholders for wildfire damages 5
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6 The WUI accounts for less than one tenth of land area. Since 1990, 43 percent of all new homes were built in the WUI!
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Who benefits from inverse condemnation? 7
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8 Outline 1. Introduction 2. Production with 1 input and 1 output 1. Production functions 2. Marginal product 3. Marginal revenue 4. Derived factor demand 5. Comparative statics 3. Production with 2 inputs and 1 output 1. Production functions 2. Marginal product, MRTS 3. Marginal revenue 4. Derived demand 5. Comparative statics
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9 Production with two variable inputs Now suppose the firm is free to choose level of both energy (E) and labor inputs (L). The two-input, one-output production function is defined functionally as q=f(E, L). This function defines a production surface .
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10 L K Production with two variable inputs : Graph 20 15 10 5 0 20 15 10 5 0 300 200 100 0 y Q L
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Project this surface into factor input space 11
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12 Isoquants : graph E L
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13 Isoquants: Math EL L L E E + - + - = 2 2 16 20 10
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14 Marginal rate of technical substitution The rate at which a producer can substitute between two inputs and maintain the same level of output. The negative slope of the isoquant. Equal to the ratio of the marginal products.
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15 MRTS : math
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MRTS math Alternatively, start with the isoquant and totally differentiate with respect to E and L 16
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17 And now for some economics… So far we have simply summarized production relationships between output and inputs. Before we introduce any economics, we need some assumptions: Production and prices are known Homogeneous product Competitive product markets Competitive factor markets Firms maximize profits Two variable inputs (L) and (K) This is long run
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Back to the nitrogen fertilizer factory…… Impose some structure on the problem: q(E,L) = 20E –E 2 +16L –L 2 +LE P=$5 P e =$7.70 Minimum wage (CA) =$11 (think of this as medium run…still some fixed factors (e.g. capital assets))
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  • Spring '16
  • Meredith Fowlie
  • Economics, MRTS

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