Economics 1021A Chapter 11

# The production function output pizza per day 1 oven 2

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ble and the quantities of both labour and capital. The Production Function Output (pizza per day) 1 Oven 2 Oven 3 Oven 4 Oven Labour 1 2 3 4 5 Marginal product of labour decreasing 4 10 13 15 16 10 15 18 20 21 13 18 22 24 25 15 21 24 26 27 Marginal product of capital decreasing Average Costs per Pizza Pizzas 4 10 13 15 16 20 25 1 oven \$12.50 \$7.50 \$7.69 \$8.33 \$9.38 ----- 2 ovens \$15.00 \$7.50 \$6.92 \$6.67 \$6.77 \$7.50 --- 3 ovens \$20.67 \$9.42 \$7.69 \$7.33 \$7.19 \$6.88 \$8.00 4 ovens \$26.67 \$11.67 \$9.36 \$8.33 \$8.07 \$7.29 \$7.50 Short-Run Costs of Four Different Plants 12.00 ATC1 10.00 9.36 ATC2 ATC3 ATC4 8.00 7.69 6.92 6.00 0 5 10 13 15 20 25 30 Long-Run Average Cost Curve 12.00 ATC1 10.00 ATC2 ATC3 ATC4 8.00 6.00 0 Least-cost plant is 1 LRAC curve Least-cost plant is 2 5 10 15 Least-cost plant is 3 18 20 Least-cost plant is 4 2425 30 Returns to Scale Returns to scale are the increases in output that result from increasing all inputs by the same percentage. Three possibilities: • Constant returns to scale • Increasing returns to scale • Decreasing returns to scale Economies of Scale Output (pizza per day) 1 Oven 2 Oven 3 Oven 4 Oven Labour 1 2 3 4 5 Ovens (number) 10 15 18 20 21 1 Marginal product of labour decreasing 4 10 13 15 16 2 13 18 22 24 25 3 15 21 24 26 27 4 Marginal product of capital decreasing Long-Run Average Cost Curve Diseconomies Economies of scale of scale 12.00 ATC1 10.00 8.00 6.00 ATC3 ATC4 MES Least-cost plant is 1 LRAC curve Least-cost plant is 2 0 ATC2 5 10 15 Least-cost plant is 3 18 20 Least-cost plant is 4 2425 30 Short-Run Costs Q TFC TVC TC MC AFC AVC ATC 0 1 4 2 2 3 4 4 3.67 25...
View Full Document

## This document was uploaded on 04/03/2014.

Ask a homework question - tutors are online