Managers of a rm to understand the nature of this

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Unformatted text preview: when fast-foodcorrespond to the highlighted input combinations in Table 6.4. When both inputs have positive marfaced shortage of young, low-wage employees, the firms may respondmore of each input increases theby recruiting older ginal products, using by automating or amount of output attainable. people to fill these positions. As we discuss in Chapters 7Hence, isoquants Qtaking this flexibility in6.8, correspond to larger and 8, by 2 and Q3, to the northeast of Q1 in Figure the production and larger quantities of output. An isoquant can also be represented algebraically, in the form of an equation, process into account, managers can choose input combinations that minimize cost and maximize profit. as 3.1 well as graphically (like the isoquants in Figure 6.8). For a production function like the ones we have been considering, where quantity of output Q depends on two inputs (quantity of labor L and quantity of capital K ), the equation of an isoquant would express K in terms of L. Learning-By-Doing Exercise 6.1 shows how to derive such an equation. Properties of Technology As in the case of consumers, it is common to assume certain properties about technology. First we will generally assume that technologies are monotonic: if you increase the amount of at least one of the inputs, it should be possible to produce at least as much output as you were producing originally. This is sometimes referred to as the property of free disposal: if the firm can costlessly dispose of any inputs, having extra inputs around can’t hurt it. Second, we will often assume that the technology is convex. This means that if you have two extreme ways to produce y units of output, ( x1 , x2 ) and (z1 , z2 ), then their weighted average will produce at least y units of output. One argument for convex technologies goes as follows. Suppose that you have a way to produce 1 unit of output using a1 units of factor 1 and a2 units of factor 2 and that you have another way to produce 1 unit of output using b1 units of factor 1 and b2 units of factor 2. We call these two ways to produce output production techniques. Furthermore, let us suppose that you are free to scale the output up by arbitrary amounts so that (100a1 , 100a2 ) and (100b1 , 100b2 ) will produce 100 units of output. But now note that if you have 25a1 + 75b1 units of factor 1 and 25a2 + 75b2 units of factor 2 you can still produce 100 units of output: just produce 25 units of the output using the “a” technique and 75 units of the output using the “b” technique. This is depicted in Figure 3. By choosing the level at which you operate each of the two activities, you can produce a given amount of output in a variety of different ways. In particular, every input combination along the line connecting (100a1 , 100a2 ) and (100b1 , 100b2 ) will be a feasible way to produce 100 units of output. In this kind of technology, where you can scale the production process up and down easily and where separate productio...
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This document was uploaded on 09/21/2013.

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