Lecture12

# Lecture12 - • Division of labor and specialization •...

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Lecture 12 Isoquants Returns to Scale Scale economies in production Marginal technical rate of substitution

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Isoquants An isoquant is a curve showing the different combination of inputs that leads to a constant output level. An isoquant map is a family of such curves. Labor Capital q = 10 q = 20 q = 30
Returns to scale How does an increase in all inputs relate to an increase in output? q(aL, aK) = aq (L, K) → constant returns to scale q(aL, aK) > aq (L, K) → increasing returns to scale q(aL, aK) < aq (L, K) → decreasing returns to scale 10 20 10 20 q=100 q = 200 10 20 10 20 q = 100 q = 250 10 20 10 20 q = 100 q = 150

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Reasons for scale economies/diseconomies

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Unformatted text preview: • Division of labor and specialization • Engineering attributes • Management and coordination • Advertising – depends on the venue • Example: Beer versus wine Substituting inputs over time • The long-run and short-run: a mix of inputs optimized for particular input prices may become suboptimal. • Example: automobile production in America and Japan Labor Capital q = 10 q = 20 q = 30 Substituting inputs: the marginal rate of technical substitution • MRTS = change in capital/change in labor for a fixed level of output = -∆K/∆L (for fixed q) Labor Capital ∆K ∆L (-1)*Slope of tangent line MRTS and Marginal Product...
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