Lecture 10 - Feb 18 - Incomplete

Lecture 10 - Feb 18 - Incomplete - Economics 100A Lecture...

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Economics 100A Lecture #10: Thursday, Feb. 18 1) Comparative statics of cost (§7.3) 2) Economies of scale (§8.1) 3) Learning by doing (§8.3) 4) Scope economies (§8.3) 5) Short run and long run (§7.4, 8.2)
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(1) Comparative statics of cost Change in cost minimization problem Output expansion path : change output level Hold all input prices fixed E.g., does production become more/less capital intensive as firm scales up? Input price path : change an input price Does firm use more/less of an input when it becomes more expensive? E.g., what effect of employment policy of minimum wage increase?
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Output expansion path Let L(Q) and K(Q) be labor and capital levels that minimize cost Plot cost-minimizing input combinations as output increases, holding input prices fixed Compare: the income-consumption curve As the output increases, then the cost- minimizing input can … Rise  a “normal” input Fall  an “inferior” input
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L K TC 0 /w TC 1 /w TC 2 /w TC 2 /r TC 1 /r TC 0 /r Isoquant Q = Q 0 Expansion path Output expansion path Isoquant Q = Q 1
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Input price change L(w; Q, r) gives labor that minimizes cost of producing Q output for each wage rate w given rental rate r . Increase the price of one input (e.g., wage) Compare: the price-consumption curve Input substitution effect: All else equal, an increase in w must decrease labor and increase capital due to diminishing MRTS L,K ( = w/r)
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L K Q 0 A B Slope = - w 0 /r TC 0 /r TC 1 /r Slope = - w 1 /r Wage rate increase: w 0 w 1 TC 1 /w 1 TC 0 /w 0 TC 0 /w 1
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L K L w L*(w ; Q 0 , r) Q = Q 0 w 1 /r w 2 /r w 3 /r L 1 L 2 L 3 o A firm’s demand for labor o o o
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Congress raised minimum wage from $5.15 to $7.25 on July 24, 2009 Will it hurt small business? Will it lead to layoffs? What is predicted effect of this increase in wage rates? Will employment fall?
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Lecture 10 - Feb 18 - Incomplete - Economics 100A Lecture...

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