Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Overview
Mix of T/F, short-answer and mini-lectures on the most important topics. Focus is on graphs and intuition, not calculations and derivations. 2 hours (though we may go a bit over). Brief time for Q&A at the end (up to 30 min). Slides will be posted on bSpace afterward.
Structure
Short-Run Cost and Production Decisions (35 min) Long-Run Cost and Production Decisions (35 min) Changes in Welfare due to Policy Interventions (30 min) Choice Under Uncertainty (15 min)
Moreover, diminishing marginal product implies that for some L>>0, marginal costs must be decreasing. Thus, beyond the optimum L*, where the crossing occurs, MPL must be greater than APL.
Effects of a $10 per unit tax on AC, MC curves. Note a lump-sum tax only moves ATC curve, not AVC or MC.
Short-Run Costs
T/F (P9). Average fixed costs never increase as output increases. True. The definition of fixed costs are costs that are independent of output. As a result, AFC=FC/q can only decrease as q increases.
Short-Run Costs
T/F The shape of the AC curve is independent of the diminishing marginal returns to labor. False. Shape of the AC curve is driven by diminishing marginal returns to labor in the AVC curve. This is because AVC=VC/q=wL/q=w/APL in the short run. Since well need it for the next question,
Long-Run Production
Suppose that as long as neither input exceeds four times the other, capital and labor are perfect substitutes at a one-to-one ratio. However, once the input ratio reaches four to one in favor of either input, no further substitution is possible. Draw the isoquants. What is the elasticity of substitution over the part where K and L are substitutable?
Elasticity of Substitution
Measures the ease with which we can substitute capital for labor. Tells us how the input factor ratio changes as the slope of the isoquant changes. If large, implies isoquant relatively flat. As decreases, curviness increases, implying that it is easier to substitute.
Answer
ON YOUR OWN: Show that the output expansion path when the inputs are perfect substitutes is either a horizontal line or vertical line depending on w>r or w<r.
http://www.economics.utoronto.ca/osborne/2x3/tutorial/OEPEX.HTM
LongRun
Because a firm cannot vary K in the SR but it can in the LR, SR cost is as least as high as LR cost.
and even higher if the wrong level of K is used in the SR.
q
For each
y > 0, the long-run MC equals the MC for the short-run chosen by the firm.
AC(y)
increasing r.t.s.
2y
Av. cost decreases with y if the firms technology exhibits increasing r.t.s. c(y)
2y
c(y)
2y
Returns to Scale
T/F If there is a single input to production and there are decreasing returns to scale, then the marginal product of the input will be diminishing. True, but only if there is only one input to production. In this case, say labor is the only input. Then MC=w/MPL. So if MPL is decreasing, MC is increasing, which drives higher costs which leads to the increasing cost function that exhibits decreasing returns to scale. Note that if you had more than one input, this would be False. Note that there is no direct connection between returns to scale (increasing, constant, decreasing) and the rate change of the marginal product of an input! Returns to scale tells us how the output changes as all inputs change by the same factor; the marginal product concerns how output changes as one input changes, holding all other inputs fixed. In particular, a production function can have increasing returns to scale even though the marginal product of every input decreases as more of that input is used.
Perfect Competition
A perfectly competitive industry is one that obeys the following assumptions:
there are a large number of firms, each producing the same homogeneous product each firm attempts to maximize profits each firm is a price taker
its actions have no effect on the market price
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The short-run market supply curve will be upward-sloping because each firms shortrun supply curve has a positive slope
40
differ
Upward-sloping if firms with relatively low minimum LRAC are willing to enter market at lower prices than others
Limited Entry
Restricting the number of firms causes supply to shift left
Taxes
Creates revenue for government to spend, decreases consumer and producer surplus, results in deadweight loss
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Taxes
For a given tax, if the government wants to maximize tax revenues it should tax a good with a relatively inelastic demand. TRUE. This minimizes the area of the DWL triangle. Draw a picture to convince yourself.
Given the supply curve, more elastic (flatter) demand means greater tax burden for sellers.
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Figure 4.9(a) shows the consequences of producing 4 million hamburgers per month instead of 7 million hamburgers per month. Total producer and consumer surplus is reduced by the area of triangle ABC shaded in yellow. This is called the deadweight loss from underproduction. Figure 4.9(b) shows the consequences of producing 10 million hamburgers per month instead of 7 million hamburgers per month. As production increases from 7 million to 10 million hamburgers, the full cost of production rises above consumers willingness to pay, resulting in a deadweight loss equal to the area of triangle ABC.
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9.5 Policies That Create a Wedge Between Supply and Demand Curves
Price ceiling creates wedge that generates excess demand of Qd Qs and DWL of C+E.
9.4 Tariffs
A tariff is essentially a tax on imports and there are two common types: Specific tariff is a per unit tax Ad valorem tariff is a percent of the sales price Assuming the U.S. government institutes a tariff on foreign crude oil: 1. Tariffs protect American producers of crude oil from foreign competition. 2. Tariffs also distort American consumers consumption by inflating the price of crude oil.
9.4 Tariffs
A $5 per unit (specific) tariff raises the world price, which increases the quantity supplied domestically and decreases the quantity imported. Tariff revenue of area D is generated by the U.S. DWL is equal to C+E.
9.4 Quotas
A quota is a restriction on the amount of a good that can be imported. When analyzed graphically, a quota looks very similar to a tariff. A tariff is a restriction on price A quota is a restriction on quantity One can find a tariff and a quota that generate the same equilibrium The only difference is that quotas do not generate any additional revenue for the domestic government.
9.4 Quotas
An import quota of 2.8 millions of barrels of oil per day increases the quantity supplied domestically and decreases the quantity imported.
Equivalent to $5 per unit tariff
Risk Premium
T/F The risk premium of a risk preferring individual is zero. False. See next slide.
Increasing MU of money (depicted by utility function above), OR Diminishing MU with EU<U(Y*) but person is wiling to pay the difference in order to get that thrill
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Give: a) The expected wealth of the homeowner. B) The homeowners expected utility. C) Minimum price an insurance company would charge for an insurance policy. D) How much better off would the homeowner be with the insurance policy (in terms of utility)? E) Would the homeowner pay $600,000 to be guaranteed wealth of 1.4 million? Why?
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Last Things
Thanks for coming and good luck! You can leave now, or stay for the brief Q &A. No more questions after 30 minutes from now. Office Hours: Monday 1-2:30 542 Evans NO EMAILS PLEASE.