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**Unformatted text preview: **Production vs. Consumption • Similar to consumers producers purchase their inputs and sell their outputs and take the prices for those as given • Producers maximise profits – consumers maximise utility. • The notion of “income” for producers is moot. Production vs. Consumption • Given the input/output prices a producer needs to decide how much output to produce and how to do this is in the most efficient way. • How much to consume was never a problem – a consumer will spend all his income; the question was only how to spend it in the most efficient way. • Thus producer faces more elaborate choice problem. We start with the second part – first answer the question how to produce any given level of output in the most efficient way. Then we decide how much output to produce. Chapter Eighteen Technology Technologies • A technology is a process by which inputs are converted to an output. • E.g. labor, a computer, a projector, electricity, and software are being combined to produce this lecture. Technologies • Usually several technologies will produce the same product -- a blackboard and chalk can be used instead of a computer and a projector. • Which technology is “best”? • How do we compare technologies? Example Producing a lathe (turning machine) • U.S. – assembly line production • India – workers actually carry the lathe along a production line. Input Bundles • x i denotes the amount used of input i; i.e. the level of input i. • An input bundle is a vector of the input levels; (x 1 , x 2 ). • E.g. (x 1 , x 2 ) = (6, 9). Production Functions • y denotes the output level. • The technology’s production function states the maximum amount of output possible from an input bundle. y f x x n = ( , , ) 1 Production Functions y = f(x) is the production function. x’ x Input Level Output Level y’ y’ = f(x’) is the maximal output level obtainable from x’ input units. One input, one output Technology Sets • A production plan is an input bundle and an output level; (x 1 , … , x n , y). • A production plan is feasible if • The collection of all feasible production plans is the technology set. y f x x n ≤ ( , , ) 1 Technology Sets y = f(x) is the production function. x’ x Input Level Output Level y’ y” y’ = f(x’) is the maximal output level obtainable from x’ input units. One input, one output y” < f(x’) is an output level that is feasible from x’ input units. Technology Sets x’ x Input Level Output Level y’ One input, one output The technology set Technology Sets x’ x Input Level Output Level y’ One input, one output y” The technology set Technically inefficient plans Technically efficient plans Technologies with Many Inputs • What does a technology look like when there is more than one input?...

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