describing technology
DESCRIPTION
Describing Technology. Isoquants Two inputs one output Illustrates marginal rates of substitution between inputs Production function Many inputs one output x = f(k,l,m) Returns to scale : increase all inputs by factor a - PowerPoint PPT PresentationTRANSCRIPT
Describing Technology
• IsoquantsTwo inputs one output
Illustrates marginal rates of substitution between inputs
• Production functionMany inputs one output
• x = f(k,l,m)
Returns to scale: increase all inputs by factor a
f(ay1,ay2,…,ayn) > af (y1,y2,…,yn) increasing returns
f(ay1,ay2,…,ayn) = af (y1,y2,…,yn) constant returns
f(ay1,ay2,…,ayn )< af (y1,y2,…,yn) decreasing returns
Isoquants
Isoquants and Cost Minimization
Isoquants and Cost Minimization
• Get Equal Bang–Per–Buck from your inputs• Let k = kapital input r1 = unit cost of kapital• l = labor input r2 = unit cost of labor• m = materials input r3 = unit cost of materials
• At input combination that results in minimum cost M for given output x
For each pair of inputs• Slope of output isoquant = slope of iso-cost line
MPPl/MPPk = (M/r1)/(M/r2) = r2/r1
Then
MPPk/r1 = MPPl /r2 = MPPm/r3