ajaz_eco204_2009_chapter_4.4

ajaz_eco204_2009_chapter_4.4 - University of Toronto,...

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University of Toronto, Department of Economics, ECO 204 2009 2010 S. Ajaz Hussain ECO 204 2009 2010 S. Ajaz Hussain (Draft) Chapter 4.4 Choice of Technology, Learning by Doing, Minimum Efficient Scale, Economies of Scope 1 Please help improve the course by sending me an e mail about typos or suggestions for improvements In this chapter we continue to assume that all inputs are variable and examine various “long run cost” topics. 1. Choice of Technology In previous chapters, our models assumed that a company’s technology – production function – is exogenously given. Now we step back and examine the choice of technology – should a company produce output with a Cobb Douglas or a complements technology? Such choices face newly founded companies and existing companies replacing an obsolete technology. Recall that in chapter 4, firms choose the cost minimizing inputs required to produce a target output ݍ . As such, a natural criteria for the choice of technology is on the basis of lowest acquisition cost plus cost of producing target output ܥሺ . This is not as easy task. First, the firm has to identify the candidate technologies. For example, suppose that a particular product (good or service) – such as “checkout” service at a supermarket – can be “produced” with a Cobb Douglas technology (labor and capital must be used as imperfect substitutes and in strictly positive amounts), or a complements technology (labor and capital must be used as complements), or a linear technology (labor and capital must be used as perfect substitutes possibly with zero amounts of an input). Here, there are three classes of technologies: ݍሻ ܳൌܣ ܮ ܭ ;ܳൌܣminሺߙܮ, ߚ ሻ; ܳ ൌ ܣሾߙܮ ൅ ߚܭሿ ܭ 1 Thanks: Yuan Fan, Beiyi Wang, For book look at choice of technology in undeveloped countries (can a similar model be built for company growth?) 1
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University of Toronto, Department of Economics, ECO 204 2009 2010 S. Ajaz Hussain 2 ext, observe that there are many special cases within each class – after all, there can be many he ܣ ܮ ଵ/ଶ ܭ ଵ/ଶ ; ܳൌܣ ܮ ܭ ଵ/ସ ;ܳൌܣminሺ2ܮ, ܭሻ; ܳ ൌ A minሺܮ, ܭሻ ; ܳ ൌ ܣሾ2ܮ ൅ ܭሿ;ܳൌܣܮ hich technology should the supermarket choose? Based on the cost minimization criterion, t ha N values for the parameters ߙ,ߚ . For example, a supermarket may be able to “produce” checkout services from (say) any of t following technologies: ܳൌ W the firm should choose the technology with the lowest acquisition cost plus ܥሺݍሻ , the cost of producing a target output ݍ . Observe that to calculate ܥሺݍሻ the supermarke s to perform
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ajaz_eco204_2009_chapter_4.4 - University of Toronto,...

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