ECON10A_13

# ECON10A_13 - Review 1 Question5:(L,K)=LK.It...

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1/4/2008 1 Review

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1/4/2008 2 Question 5:  A firm’s production function is F(L, K)=LK. It  currently uses 6 units of L and 3 of K. Which would give it  more additional production: A. 1 unit of labor (L) B. 1 unit of capital (K).
1/4/2008 3 Question 2:  A firm’s production function is F(L, K)=LK. It  currently uses 6 units of L and 3 of K. If it lost a unit of labor,  how much extra capital would it need to be just as productive  as it was before?  A. ½ B. 2 C. Can’t tell

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1/4/2008 4 Isoquants Isoquant: Set of input bundles that yield the same output Analogous to, but not the same as indifference curves! L K L 0 L 1 K 1 K 0
1/4/2008 5 MRTS – Marginal Rate of Technical Substitution MRTS(L, K) If you took away 1 unit of labor, how much extra capital firm would need to maintain same level of production as before. Note 1: Depends on L and K Note 2: This is the slope of the isoquant at the point L, K . MRTS(L,K)=MP L /MP K = same logic as we used in consumer theory for MRS. L K Slope = - MP L /MP K K K L F L K L F ) , ( ) , ( Analogous to, but not the same as MRS!!!

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1/4/2008 6 Hypothesis of Diminishing MRTS If you have more L, then when you give up a unit of L, it takes less K to bring you back to the same level of production Test: Does K↓ L ↑ imply MRTS ↓? Ex. F(L,K)=LK MRTS(L,K)= MP L /MP K =K/L K↓ L ↑ implies K/L↓ Therefore, this production function exhibits diminishing MRTS L K Slope = - MP L /MP K
1/4/2008 7 Returns to Scale F(L,K) exhibits increasing/constant/decreasing returns to scale if F(λL, λL) >=<λF(L,K), for λ>1 Example: For increasing returns, doubling inputs more than doubles output L K Q 5 15 200 10 30 500

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ECON10A_13 - Review 1 Question5:(L,K)=LK.It...

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