Lecture 10 _Feb 21_

Lecture 10 _Feb 21_ - Economics 100A Lecture#10 Thursday...

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Unformatted text preview: Economics 100A Lecture #10: Thursday, Feb. 21 1) Comparative statics of cost 2) Returns to scale and costs 3) Learning by doing 4) Scope economies 5) Short run and long run (1) Comparative statics of cost ¡ Change in cost minimization problem ¢ Output expansion path: change output level ¡ Hold all input prices fixed ¡ Does production become more/less capital intensive? ¢ Input price path: change an input price ¡ Does firm use more/less of input when it becomes more expensive? ¡ E.g., what effect of employment policy of minimum wage increase? Output expansion path ¡ Let L(Q) and K(Q) be labor and capital levels that minimize cost ¢ Plot cost-minimizing input combinations as output increases, holding input prices fixed ¢ Compare: the income-consumption curve ¡ As the output increases, then the cost- minimizing input can … ¢ Rise ÍÎ a “normal” input ¢ Fall ÍÎ an “inferior” input L K TC /w TC 1 /w TC 2 /w TC 2 /r TC 1 /r TC /r Isoquant Q = Q Expansion path Output expansion path Isoquant Q = Q 1 Input price change ¡ L(Q, w) gives labor that minimizes cost for each wage rate. ¢ Increase the price of one input (e.g., wage) ¢ Compare: the price-consumption curve ¡ input substitution effect: ¢ All else equal, an increase in w must decrease labor and increase capital due to diminishing MRTS L,K ( = w/r) L K Q A B Slope = - w /r TC /r TC 1 /r Slope = - w 1 /r Wage rate increase TC 1 /w 1 TC /w TC /w 1 L K L w L*(Q ,w,r) Q = Q w 1 /r w 2 /r w 3 /r L 1 L 2 L 3 o A firm’s demand for labor o o o Increase in minimum wage ¡ Congress raised minimum wage from $5.15 to $7.25 ¢ Will it hurt small business? ¢ Will it lead to layoffs? ¡ What is predicted effect of increase in wage? ¢ Will employment fall? ¢ How will output expansion path change? K, machines per year L, workers per year $7.25/hour $5.15/hour Decomposing wage increase Input substitution Output effect (2) Returns to scale and cost ¡ Production function determines shape of cost curve ¡ Relation to returns to scale...
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This note was uploaded on 04/01/2008 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

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Lecture 10 _Feb 21_ - Economics 100A Lecture#10 Thursday...

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