As we move from point a on curve o1 to b on curve o2

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Unformatted text preview: ve O3 over time, labor productivity increases. Fig 06-02.EPS PHALL-82241 PINDYCK CHAPTER 06 page 6 of 12 FIGURE 6.3 Cereal Yields and the World Price of Food 350 3.6 3.4 Food price index (1990 = 100) 3.2 Cereal Yield 3 250 2.8 200 2.6 2.4 150 Food Price Index 2.2 2 100 1.8 50 1.6 1970 1975 1980 1985 1990 1995 2000 2005 Cereal yields have increased. The average world price of food increased temporarily in the early 1970s but has declined since. Fig 06-03.EPS Cereal yields (metric tons per hectare) 300 PHALL-82241 PINDYCK CHAPTER 06 page 7 of 12 FIGURE 6.4 Production with Two Variable Inputs Capital per year E 5 4 3 A B C q3 � 90 2 q2 � 75 D 1 q1 � 55 1 2 3 4 5 Labor per year Production isoquants show the various combinations of inputs necessary for the firm to produce a given output. Aset of isoquants, or isoquant map, describes the firm’s production function. Output increases as we move from isoquant q1 (at which 55 units per year are produced at points such as A and D), to isoquant q2 (75 units per year at points such as B) and to isoquant q3 (90 units per year at points such as C and E). Fig 06-04.EPS PHALL-82241 PINDYCK CHAPTER 06 page 8 of 12 FIGURE 6.5 Marginal Rate of Technical Substitution Capital per year 5 �K = 2 4 �L = 1 3 �K = 1 �K = 2⁄ 3 2 �L = 1 �L = 1 q3 = 90 1 �K = ⁄ 3 1 q2 = 75 �L = 1 q1 = 55 0 1 2 3 4 5 Labor per year Like indifference curves, isoquants are downward sloping and convex. The slope of the isoquant at any point measures the marginal rate of technical substitution-the abi...
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