Class 7s - Department of Economics LeBow College of...

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Department of Economics Fall 2009 LeBow College of Business Microeconomics 301 Drexel University Professor Stehr Class 7 Outline 1) Production function 2) Production in the short run 3) Production in the long run 4) Returns to scale The consumer’s problem is to maximize his utility given his budget constraint. The firm’s problem is to maximize profits given its technology, input prices, competitors’s behavior and demand. Theory of the firm: Production Function mathematical relationship between inputs and outputs q = F(K,L) where q is the output of the firm, K is capital used by the firm and L is labor used by the firm Examples: Short run- Ex1: Size of a plant Ex2: Union labor contract specifies number of workers 1
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Ex1: New plant may be built Ex2: Can negotiate a new contract or go non-union (unless you’re in Philadelphia) Production with one variable input (short run) Total product— TP is usually denoted “q” as in quantity. Average product— Average product of labor or AP L = q / L Marginal product— MP L = MP K = The marginal product of labor generally depends on the amount of capital because workers can get more accomplished when they have more capital to work with. Example 1:
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Class 7s - Department of Economics LeBow College of...

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