611510 - Chapter 10 Theory of Production and Cost in the...

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10.1 Chapter 10 –Theory of Production and Cost in the Long Run(LR) The theory of production in the LR provides the theoretical basis for firm decision-making and LR costs and supply. In essence, we will assume that the firm’s goal is to maximize output subject to a cost constraint. We will see that this is the same as minimizing the cost of producing a given level of output. Keep in mind that all inputs are variable in the LR plant size can be changed, new locations can be chosen
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10.2 Production Isoquants An isoquant is a locus of points indicating different combinations of 2 inputs each of which yields the same level of output. Note 2 inputs are assumed since we desire to present model graphically. ) , ( K L f Q =
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10.3 Characteristics of Isoquants Negative slope – tradeoffs, if more of L then less of K if output is held constant Convex to the origin – diminishing MRTS, the more of L you have relative to K the more able you are to trade L for K and hold output constant. Isoquants cannot intersect
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10.4 Marginal Rate of Technical Substitution The MRTS is the (negative of the) slope of the isoquant. Therefore it reflects L K MRTS = It is a measure of the number of units of K that must be given up if L is increased by a single unit, holding output constant. Note it will diminish as we move down an isoquant.
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10.5 Concept of an Isoquant Map Graph of several isoquants each representing different levels of output. The higher (further from the origin) an isoquant, the greater the level of output.
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10.6 Marginal Product and MRTS Marginal product of an input is the change in total product in response to increasing the variable input by a single unit. The change in total product is given by the following equation ) ( ) ( K MP L MP Q K L + =
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10.7 Marginal Product and MRTS Along an isoquant the change in output is equal to zero and MRTS MP MP L K L MP K MP K MP L MP K L L K K L = = - = - + = ) ( ) ( ) ( ) ( 0 ) ( ) ( K MP L MP Q K L + =
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10.8
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This note was uploaded on 09/18/2011 for the course ECO 6115 taught by Professor Staff during the Spring '08 term at University of Central Florida.

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611510 - Chapter 10 Theory of Production and Cost in the...

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