Theory of Production and cost

# Ε c 1 means constant ac neither economies nor ε

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C < 1 means falling AC, economies of scale. ε C = 1 means constant AC, neither economies nor  ε diseconomies of scale. C > 1 means rising AC, diseconomies of scale. ε Scale economies Index=1- C  ε Cost elasticity and economies  of  scale

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Long run cost curves Output Cost LRMC LRAC A
Long run cost curves Output Cost LRMC LRAC A SAC1 SMC1 q1 q0 B SAC2 SMC2 SAC3 SMC3

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Joint output in a single firm > Output achieved by  two different firms producing them separately Degree of economies of scope Economies of scope ) , ( ) , ( ) ( ) ( 2 1 2 1 2 1 q q C q q C q C q C SC - + =
Product transformation curve O1 O2 Number of  cars Number of  tractors

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Learning curve Cumulative units  of output Labour input  per output 1 0   and   0 B   A,    where constants   are     B,   A, output   of   unit   per   input   Labour L output   of   units   cumulative N   where < < = = + = - β β β BN A L
Returns to scale and learning  curve Output Cost Economies of scale Learning

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Originally, MicroCorp faced input prices of Rs.10  for both labor and capital. MicroCorp has a contract  with its parent company, Econosoft, to produce 100  units a day through the production function:  Q=2(LK)1/2   MPL=(K/L)1/2  MPK=(L/K)1/2  If the price of labour increased to Rs. 40,  calculate the effect on capital and labour. Exercise
Answer L 50 K 50 K 2 100 KK 2 Q KL 2 Q L K 10 10 K / L L / K r w MP MP : Originally K L = = = = = = = = K 100 L 25 L 4 100 LL 4 2 Q KL 2 Q L 4 K 10 40 K / L L / K r w K MP L MP : Change After = = = = = = = =
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