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11-Production in LR - Production Production in the Long-Run...

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1 Production: Production in the Long-Run Returns to Scale Reading: Chapter 6
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2 Long-Run Production Both capital and labor are variable Firms can substitute freely between L and K Many combinations of L and K can produce a given level of output The information can be represented graphically using isoquants Curves showing all possible efficient combinations of inputs that yield the same output: ( , ) q f L K =
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3 Long-Run Production
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4 Isoquant Map Labor per year 1 2 3 4 5 Ex: 55 units of output can be produced with 3K & 1L (pt. A) OR 1K & 3L (pt. D) q 1 = 55 q 2 = 75 q 3 = 90 1 2 3 4 5 Capital per year D E A B C
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5 Isoquants and Diminishing Returns Labor per year 1 2 3 4 5 Increasing labor holding capital constant (A, B, C) OR Increasing capital holding labor constant (E, D, C) q 1 = 55 q 2 = 75 q 3 = 90 1 2 3 4 5 Capital per year D E A B C
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6 Substituting Among Inputs Slope of an isoquant shows the ability of a firm to substitute one input for another while holding output constant
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