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

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