ajaz_eco204_2009_chapter_4.5

ajaz_eco204_2009_chapter_4.5 - University of Toronto,...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
University of Toronto, Department of Economics, ECO 204 2009 2010 S. Ajaz Hussain ECO 204 2009 2010 S. Ajaz Hussain (Draft) Chapter 4.5: Short Run Production Function, Returns, Short Run CMP, and user cost of capital 1 Please help improve the course by sending me an e mail about typos or suggestions for improvements The focus of this chapter is on the optimal choice of inputs required to produce an exogenously given target level of output in the short run (when at least one input is fixed). We denote fixed inputs by lowercase letters (for example: ݈,݇ ) and variable inputs by U PPERCASE letters (for example: ܮ, ܭ ). For tractability, for the majority of this chapter, we assume that labor and capital are the only inputs where capital is fixed and labor is variable so that the short run production function takes the form: ܳൌܣ ݂ሺܮ,݇ሻ Again, it should be stressed that treating labor as a variable input and capital as a fixed input is an assumption. In some settings, labor is fixed and capital variable (for example: Ecoman is fixed and class rooms variable) so that: ݂ሺ݈ ,ܭሻ In this chapter, we will model the optimal choice of variable inputs and derive the cost function ܥሺݍሻ , the cost of producing the target output ݍ . In contrast to earlier chapters, the cost function will now consist of total fixed cost (cost of the fixed inputs) plus total variable cost (cost of the optimal variable inputs): ܥሺݍሻ ൌ ܶܨܥ ൅ ܸܶܥሺݍሻ 1 Note to self: next semester: model technology in 4.1 and introduce choice of inputs for an inputs price making firm. 1 ECO 204 (Draft) Chapter 4.5
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
University of Toronto, Department of Economics, ECO 204 2009 2010 S. Ajaz Hussain Let us begin by looking at “returns”, the short run counterpart of the long run “returns to scale”. 1. Returns From chapter 4.1, recall that returns to scale ‐‐ a long run concept – tells us the impact output when all inputs are doubled: there are increasing returns to scale if doubling all inputs more than doubles output; there are constant returns to scale if doubling all inputs doubles output; and there are decreasing returns to scale if doubling all inputs less than doubles output. The short run counterpart of returns to scale is “returns”: there are increasing returns if doubling all variable inputs more than doubles output; there are constant returns if doubling all variable inputs doubles output; and there are decreasing returns if doubling all variable inputs less than doubles output. Formally, returns can be expressed as: ܳൌܣ ݂ሺFixed inputs, V riable inputsሻ a Suppose the company is currently producing output by using ܮ workers and ݇ machines: ݍ ݂ሺܮ ,݇ሻ Returns can be re expressed as: Increasing Returns Output with doubled variable inputs > Double initial output with initial inputs ܣ ݂ሺ2ܮ, ݇ሻ ൐ 2ܣ݂ሺܮ, ݇ሻ Constant Returns Output with doubled variable inputs = Double initial output with initial inputs ܣ ݂ሺ2ܮ, ݇ሻൌ2 ܣ݂ሺܮ Decreasing Returns
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

Page1 / 44

ajaz_eco204_2009_chapter_4.5 - University of Toronto,...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online