301lec10b

301lec10b - Topics Production Functions Marginal Products...

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Topics Production Functions Marginal Products and Marginal Returns Returns to Scale Firm's profit maximization problem Costs
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Marginal Rate of Technical Substitution Labor per month 1 2 3 4 1 2 3 4 5 5 Capital per year Negative Slope measures MRTS; MRTS decreases as move down the indifference curve 1 1 1 1 2 1 2/3 1/3 Q 1 = 55 Q 2 = 75 Q 3 = 90
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Law of Diminishing Marginal Returns From our examples, we can see that as we increase the use of an input (labor for example) the additional output produced declines Law of Diminishing Marginal Returns : As the use of an input increases with other inputs fixed, the marginal product of this input will eventually decrease
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Law of Diminishing (Marginal) Returns Mathematically, dMP k /dI k = d 2 Q/dI k 2 = F” k < 0
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Law of Diminishing Marginal Returns When the use of labor input is small and capital is fixed, the marginal product of labor is large and may be increasing at first since workers can begin to specialize When the use of labor input is large, there are two many workers compared to capital so the marginal product of labor decreases
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Law of Diminishing Marginal Returns Typically applies only for the short run when one variable input is fixed Can be used for long-run decisions to evaluate the trade-offs of different plant configurations Assumes the quality of the variable input is constant
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301lec10b - Topics Production Functions Marginal Products...

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