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CH3Review ECO 3203

# CH3Review ECO 3203 - Chapter 3 Review Production function...

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Chapter 3 Review Production function – relationship between inputs and output Example: Y = AL .7 K .3 What does A measure? What is the significance of the .7 and the .3? Why is constant returns to scale a good assumption for the U.S. economy-wide production function? Labor demand curve – how many workers firms are willing to hire at the going real wage Firms are profit maximizers Firms will hire more labor as long as the marginal benefit is at least as great as the marginal cost Check out the simple handout example from class and notice that as the real wage changes, the firm will change the number of workers hired. Example: The firm has a production function Y = 10 L .5 K .5 . Suppose K is equal to 64, p is the price of the output, and w is the nominal wage rate. Assume that there are no other costs. The firm will hire more labor as long as its profit continues to rise. We want to find the point where the change in profit caused by a change in labor is equal to zero.

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CH3Review ECO 3203 - Chapter 3 Review Production function...

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