PAM_2000_Spring_2009_Lecture_12

# PAM_2000_Spring_2009_Lecture_12 - PAM 2000 Lecture 12...

This preview shows pages 1–10. Sign up to view the full content.

PAM 2000 Lecture 12 Agenda: Input choice in the long run LRAC and SRAC Economies of Scope Competitive firms and markets

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Input Choice in the Long-Run  Recall: Isoquants show the tradeoffs between K and L firm can make to produce the same constant amount of output Slope is the marginal technical rate of substitution Isocost show the combos of K and L that yield a constant input cost C = wQ L + rQ K
Input Choice in the Long-Run (con’t) Slope of isocost is –w/r Relative price of inputs Rate at which input prices allow the firm to trade inputs for each other

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Input Choice in the Long-Run (con’t) Isocost differs from consumer’s budget line since the consumer only has one budget line, but the firm has many isocost lines Each corresponds to a different level of expenditure, different amounts of output Firm chooses the lowest cost way to produce a given level of output
Input Choice in the Long-Run (con’t) Firm will pick that bundle where the lowest isocost line is tangent to the relevant isoquant (so the isocost line moves down, not the isoquant ) This is the bundle where the isoquant and the isocost line are tangent

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Cost Minimization
Input Choice in the Long-Run  (con’t) At the point of tangency, the slope of isoquant and isocost are equal, by definition Recall that slope of isoquant = MRTS = -MP L / MP K Slope of isocost is -w/r So at the tangency point, MP L /MP K = w/r

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Input Choice in the Long-Run  (con’t) So firm picks a combination of K and L such that the rate at which the firm can substitute inputs in the production process is exactly the same as the rate at which it can trade K for L in the input market Can rewrite this as: MP L /w = MP K /r
Input Choice in the Long-Run (con’t) This is the “last dollar rule” (equi-marginal principle for consumer) Costs are minimized if inputs are chosen so that the last dollar spent on labor gives as much output as

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 36

PAM_2000_Spring_2009_Lecture_12 - PAM 2000 Lecture 12...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online