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W12 MIC 13 Production Theory

# W12 MIC 13 Production Theory - PRODUCTION THEORY(B&B...

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1 Northwestern University ECON 310-1: Microeconomic Theory Profs. Jim Hornsten & Ron Braeutigam Winter 2012 PRODUCTION THEORY (B&B Chapter 6) Notes for Lecture #13 Production Process (Technology) Single Output Production Function Marginal & Average Product of Labor Multi-Input Technologies Marginal Rate of Technical Substitution Isoquants Input Substitution

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2 Northwestern University ECON 310-1: Microeconomic Theory Profs. Jim Hornsten & Ron Braeutigam Winter 2012 APPLE CRISP PRODUCTION FUNCTION AC = min G + J 5 , B + M , 4 3 F , O , S ,2 C " # \$ % & OUTPUT : AC = Apple Crisp INPUTS : G = Granny Smith apples J = Jonathan apples B = Butter (stick) M = Margarine (stick) F = Flour (cup) O = Rolled Oats (cup) S = Brown Sugar (cup) C = Cinnamon (tsp) Assume you have measuring cups, a large bowl, a wooden spoon, a sharp chef’s knife, a cutting board, an apple peeler, a pinch of salt, a 9x13 pan, a preheated-to-350 ° F oven usable for 60 minutes & vanilla ice cream. From this production function, try to derive the recipe for apple crisp! Does it matter whether you are making this to consume yourself or to sell to others as part of a profit-seeking operation?
Economists often treat Firms as Black Boxes Industrial engineers and operations researchers focus a bit more on setting up factories and the physical transformations of inputs into outputs. Economists summarize all of the behind-the-scenes physics into a production function, or equivalently, cost curves. Assuming input are converted to outputs in a predictable way, how should the firm then behave? I.e., if we assume that technology is given, the firm makes simple choices - such as output or price - to maximize profit. An ECON problem is often posed as a mathematical profit-maximization problem. Example of an economic profit - maximization problem: Firm : max q " [ q ] = q P [ q ] # ATC [ q ] ( ) , where q is output, " [ q ] is profit (a function of q), P [ q ] is price, and ATC [ q ] is average total cost. The firm chooses q to maximize profit. INPUTS OUTPUT

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4 Northwestern University ECON 310-1: Microeconomic Theory Profs. Jim Hornsten & Ron Braeutigam Winter 2012 Production Process (Technology): Converts a set of inputs to a set of outputs Raw Materials (amount of leather/month) Labor (hours of human effort/month) Fuel (Kilowatt-Hours/month) Capital (Machine-Hours /month) SYN: Inputs, Factors of Production, “Factors” Running Shoes (Pairs/month) Basketball Shoes (Pairs/month) Tennis Shoes (Pairs/month) SYN: Outputs, Product PRODUCTION PROCESS (Technology)
5 Northwestern University ECON 310-1: Microeconomic Theory Profs. Jim Hornsten & Ron Braeutigam Winter 2012 A Typical U.S. Corporation’s Organizational Chart FINANCE DIVISION 1. Capital Budgeting (pick projects) 2. Capital Structure (raise \$) 3. Distribution Policy (DIVs?) Chief Financial Officer (CFO) MARKETING DIVISION Research Mkt, Forecast Demand, Set Prices, Design & Promote Product Chief Marketing Officer (CMO) OPERATIONS DIVISION Engineers design it, collect inputs, produce it, transport it Chief Operations Officer (COO) Chief Executive Officer (CEO) Board of Directors (BOD) Shareholders (SH)

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