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7.1
isoquant is a curve composed of all bundles that produce some fixed quantity of output. An example: Y=(1200Z1Z2)1/2 Setting y =120 and simplifying gives 12=Z1Z2 (see Figure 7.1).
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7.3
MRTS measures the rate at which one input can be substituted for the other, with output remaining constant. The MRTS is the absolute value of the slope of the isoquant.
7.4
are perfect substitutes when one output can always be substituted for the other on fixed terms and the MRTS is constant. With perfect compliments, substitution is impossible and the MRTS cannot be defined for the bundle at the kink in the isoquant.
7.5
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7.6
7.7
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7.8
the quantity of input 1 is decreased by Z1, the change in y is (approx) the marginal product of the input times the change in the quantity of input 1. Therefore: y =MP1 yz1 Similarly: y =MP2 yz2
7.9
Z1 is very small, MRTS can approximated by z2/z1 Solving for Z1 & Z2 and substituting from above yields MRTS = (y/MP2)(y/MP1) Reducing gives MRTS = MP1/MP2 Therefore MRTS is equal to the marginal product of input 1 divided by the marginal product of input 2.
7.10
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Returns to Scale
Increasing
returns to scale occurs when increasing all inputs by X% increases output by more than X%. Constant returns to scale occurs when an increase in all inputs of X% increases output by X%. Decreasing returns to scale occurs when an increasing all inputs by X% increases output by less than X%.
7.11
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7.12
cost function shows the minimum cost of producing any level of output in the long-run. The long-run cost minimizing problem is: minimize w1z1+w2+z2 choosing z1 and z2 subject to constraint y=F(z1, z2)
7.13
solution to the cost minimization problem gives the values of the endogenous variables (z1* & z2*) as a function of the exogenous variables (y, w1 and w2). Since z1* & z2* are dependent upon the level of y chosen, the input demand functions are described as conditional demand functions.
7.14
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we know the input demand functions, the long-run cost function is the sum of the input quantities and their respective prices. TC(y,w1,w2) = w1z1* +w2z2*
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7.16
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7.17
2.
The cost minimizing input bundle is on the isoquant: y F(z1* +z2*). The MRTS is equal to w1/w2 at the cost minimizing bundle: MRTS(z1*z2*) w1/w2
The second principle can be generalized by stating the marginal product per dollar must be identical for all inputs.
7.18
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1.
2.
If all input prices change by the same factor of proportionality (a): The cost of minimizing the input bundle for y units of output does not change. The minimum cost pf producing y units of output changes by (a).
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7.20
If the cost-minimizing quantity of both inputs (i and j) is positive and there is diminishing MRTS, if pi increases and pj does not, the cost minimizing quantity of i increases and j decreases. If the price of an input increases and the quantity demanded of that input is positive, the minimum cost of producing any level of output rises.
2005 Pearson Education Canada Inc.
7.21
expansion path connects the cost minimizing bundles that are generated as output increases. A normal input is one where the quantity demanded increases when output rises. An inferior input is one where the quantity demanded decreases when output rises.
7.22
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7.23
homothetic production function is a type of function where the expansion path is a ray through the origin. For these types of functions the MRTS is constant along any ray from the origin.
7.24
average costs (LAC) is equal to the total cost of output (TC) divided by the quantity of output (y): LAC(y)=TC(y)/y output rises, LAC is constant, decreasing, or increasing as there are constant, increasing, or decreasing returns to scale.
2005 Pearson Education Canada Inc.
As
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7.27
marginal cost (LMC) is the rate at which costs increase as output increases (the slope of TC). When LMC lies below LAC, LAC is decreasing, when LMC exceeds LAC, LAC is rising, LMC intersects LAC at the LAC minimum.
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2005 Pearson Education Canada Inc.