Chapter5_2_ - Labour Demand in the Long-Run All inputs are...

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Labour Demand in the Long-Run All inputs are variable—no fixed costs Two stages in examining firm’s production and employment decisions: 1. The minimum-cost method of producing any level of output is examined. to determine optimal combination of L and K given Q and factor prices 2. Given that each output will be produced at minimum cost, the profit-maximizing level of output is chosen.
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Labour Demand in the Long-Run Isoquants Isoquants ( ( “Equal quantity” ): ): Each isoquant depicts the various combinations of L and K which can be used to produce a particular level of output. Isoquants depicting larger quantities of output will be further from the origin because they require greater quantities of inputs. Shape of isoquant reflects technological possibilities for substituting L and K in production process. Slope exhibits a diminishing marginal rate of technical substitution (MRTS)=MPL/MPK
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Isoquants K N 0 Q 0 Q 1
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Labour Demand in the Long-Run Isocost Line: Isocost Line: All combinations of capital and labour that can be bought for a given total cost TC = rK + wN K = capital and N = labour r = price of capital w = wage The greater the COST outlay, the further the isocost line will be from the origin (more of both N and K can be purchased).
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Isocost N K c 1 /r 0 C 0 /r 0 S l o p e = - w 0 / r 0 C 0 /w 0 c 1 /w 0 Higher Cost Lower Cost
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Stage 1: Cost-Minimizing Method of Producing Output A profit-maximizing firm will choose the
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This note was uploaded on 02/05/2012 for the course ECON 4140 taught by Professor A during the Spring '11 term at York University.

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Chapter5_2_ - Labour Demand in the Long-Run All inputs are...

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