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Chapter5-ME

# Chapter5-ME - PRODUCTION As always the firm will organize...

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PRODUCTION As always, the firm will organize its means of production to maximize profit. Chapter 5 slide 1 To do this it must balance input productivity and input costs. The firm’s production function: Q = F(L, K), lists the amount of output it can produce with specified amounts of labor and capital.

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PRODUCTION in the SHORT RUN In the short run, only 1 input is variable and the other inputs are fixed. 5.2 For instance, with the firm’s plant and capital fixed, it increases output by using more and more labor hours. The “Law” of Diminishing Returns: With other inputs fixed, the marginal product of labor declines as more and more hours are added.
PRODUCTION in the SHORT RUN Optimal use of the Variable Input 5.3 occurs at L* where Marginal Revenue Product = MC INPUT , P MP L = Wage. Example. Q = 60L – L 2 , P = \$2 per unit, and wage = \$16 per hour. Then, MP L = 60 – 2L, so we have (2)(60 – 2L) = 16, implying, L* = 26 hours . In turn, Q* = (60)(26) – (26) 2 = 884 units , and Profit = (\$2)(884) – (\$16)(26) = = \$1,352 .

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PRODUCTION in the LONG RUN
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Chapter5-ME - PRODUCTION As always the firm will organize...

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