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Unformatted text preview: 3. Cost and Technology Microeconomic Analysis, Chapters 1-5 Intermediate Microeconomics, Chapter 18-23 I. Describing the Firm A. The neoclassical description of the firm is really just a description of the firm’s production possi- bilities. 1. How inputs create outputs 2. How much has to be expended to get those inputs 3. How these two factors generate cost curves for the firm. a. These cost curves will, in turn, describe everything we need to know about the firm . B. Input/Output 1. The firm produces a quantity y of its products. a. We’ll usually focus on a firm with a single output, y . 2. The firm has a set of inputs it can use to create these products. a. In production, the firm will use a bundle of inputs to produce an output. b. We describe these inputs as a vector x = ( x 1 ,x 2 .... ) • The vector describes the number of each input being utilized in production. c. We’ll usually isolate attention on a vector x = ( x 1 ,x 2 ) C. Technology 1. What output y can the firm produce with a bundle x ? 2. This is described by the firm’s technology. 3. The input requirement set V(y) describes all of the bundles x that can produce an output y . Ex: Activity analysis and production plans. 4. The production function y = f ( x ) describes the maximum output that can be produced with any input bundle . Ex: Cobb-Douglas technology Ex: Leontief technology 5. An isoquant is the set of outputs that can produce some fixed input y * . D. Common assumptions about technology 1. Monotonicity a. Intuitively, this just says that if you can produce y with x you can create y with a bigger bundle x > x . b. More input always creates more output. c. You’re assuming though that extra inputs can at the very least be thrown away. 2. Convexity a. For any 0 < α < 1 if plans x and x are in V ( y ) (i.e. can produce y ), then α x + (1- α ) x is in V ( y ). 1 b. If a production plan can be replicated, then it is reasonable to say that the technology is convex....
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- Fall '09
- Economics of production, Average cost, Technology Microeconomic Analysis