9-17 Lecture

9-17 Lecture - When marginal yield is negative there is...

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PAM 2000 9/17/09 – Lecture Firm – organization that converts inputs (labor, capital, materials) into outputs (goods and services) Mathematical relationship between quantity of inputs and maximum output that can be produced: q = f (L,K) L = labor K = capital Marginal Product of labor – how much output a company receives from hiring an additional worker MP L = Δq/ΔL Law of diminishing marginal returns – as a firm increases quantity of one input: 1. the corresponding increases in output will eventually become smaller 2. Marginal product of the input will eventually diminish At one point, every addition unit of labor will diminish returns Not total returns, but rather diminishing marginal returns
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Unformatted text preview: When marginal yield is negative, there is diminishing total returns. If the marginal yield becomes smaller, there is diminishing marginal returns. Diminishing marginal return assumes technology stays constant Isoquant curve – efficient combinations of L and K that can produce a single quantity of output Marginal Rate of Technical Substitution (MRTS) – slope of the isoquant curve. Tells how many units of K can be replaced by one extra unit of L while keeping production constant-MP L /MP K = ΔK/ΔL = MRTS Returns to Scale – how output changes if all inputs are increased by an equal proportion...
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