Lecture 10 - Feb 18 - Incomplete

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

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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?
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
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
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...

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