q=10 tons capital labor t v costs of producing 10 tons of mop shells decreases, and more capital and...
DESCRIPTION
Big operators One-boat captains Schooners, mech. pumps manual pumps Q = 10 tons Q = 15 tons Q = 200 tons Big operator: Burns, Philps & Co (BP) owned 2 dozen luggers One-boat captain: Federick Everett (FE)TRANSCRIPT
Suppose government loan subsidies reduce the cost of capital (c) to one-boat captains so that . What happens to the cost minimizing way of producing 10 tons of MOP shells?
Q=10 tons
Capital
Labor
T
(𝑇𝐸𝑇
𝑐1)
𝐾 𝑇
𝐿𝑇
(𝑇𝐸𝑇
𝑐2)
V𝐾 𝑉
𝐿𝑉
(𝑇𝐸𝑉
𝑐2)
Costs of producing 10 tons of MOP shells decreases, and more capital and less labor are used to produce it, e.g., the one-boat captains purchase mechanical air pumps.
Suppose government loan subsidies reduce the cost of capital (c) to one-boat captains so that . What happens to the cost minimizing way of producing 10 tons of MOP shells?
Q=10 tons
Capital
Labor
T
(𝑇𝐸𝑇
𝑐1)
𝐾 𝑇
𝐿𝑇
(𝑇𝐸𝑇
𝑐2)
V𝐾 𝑉
𝐿𝑉
(𝑇𝐸𝑉
𝑐2)
With lower costs, the profit maximizing level of output is likely to increase to, say, Q=13 tons.
Q=13 tons
W
𝐿𝑊
𝐾𝑊
Sub: Substitution EffectSc: Scale Effect
ScSub
SubSc
Big operators
One-boat captains
Schooners, mech. pumps
manual pumps
Slope = capital labor ratio
Q = 10 tons
Q = 15 tons
Q = 200 tons
Big operator: Burns, Philps & Co (BP) owned 2 dozen luggers
One-boat captain: Federick Everett (FE)
How can you explain BP > FE ?
Labor and capital are…
LaborLabor
Capital Capital
Perfect Complements Perfect Substitutes
Suppose there are two inputs in the production function – labor and capital – and that these two inputs are perfect substitutes. The existing technology permits one machine to do the work of three persons. The firm wants to produce 100 units of output. Suppose that the price of capital is $750 per machine per week and that the weekly salary of each worker is $300. Which combination of inputs should the firm use?
Labor
Capital
What do the isoquants look like?
9 Labor
Capital
9
3
𝑀𝑅𝑇𝑆=∆𝐾∆ 𝐿=−
𝑀𝑃𝐿
𝑀𝑃𝐾=− 1
3
Labor is 1/3 as productive as capital
Labor
Capital
9
3
Labor
Capital
Suppose there are two inputs in the production function – labor and capital – and that these two inputs are perfect substitutes. The existing technology permits one machine to do the work of three persons. The firm wants to produce 100 units of output. Suppose that the price of capital is $750 per machine per week and that the weekly salary of each worker is $300. Which combination of inputs should the firm use?
What do the isoexpenditure curves look like?
𝐾=(𝑇𝐸𝑐 )−(𝑤𝑐 )𝐿
c
w
𝐾=(𝑇𝐸750 )−( 300750 )𝐿
¿ (𝑇𝐸750 )−( 25 )𝐿
Suppose TE = 3000. In this case,
𝐾=4 −( 25 )𝐿
4
10
Pick an isoquant—suppose can be produce using either L =15 or K =5.
Pick an isoexpenditure line—suppose TE0 =$3000
Labor
Capital
Suppose there are two inputs in the production function – labor and capital – and that these two inputs are perfect substitutes. The existing technology permits one machine to do the work of three persons. The firm wants to produce 100 units of output. Suppose that the price of capital is $750 per machine per week and that the weekly salary of each worker is $300. Which combination of inputs should the firm use?
c
w
5
4
1510
Q*
TE0
Pick an isoquant—suppose can be produce using either L =15 or K =5.
Pick an isoexpenditure line—suppose TE0 =$3000
Labor
Capital
Suppose there are two inputs in the production function – labor and capital – and that these two inputs are perfect substitutes. The existing technology permits one machine to do the work of three persons. The firm wants to produce 100 units of output. Suppose that the price of capital is $750 per machine per week and that the weekly salary of each worker is $300. Which combination of inputs should the firm use?
c
w
5
15
4
10
TE0
Q* ( 𝑇𝐸1
$ 750 )=¿
( 𝑇𝐸2
$ 300 )
TE1
TE2
=$750*5=$3750
=$300*15=$4500
Pick an isoquant—suppose can be produce using either L =15 or K =5.
Pick an isoexpenditure line—suppose TE0 =$3000
Labor
Capital
Suppose there are two inputs in the production function – labor and capital – and that these two inputs are perfect substitutes. The existing technology permits one machine to do the work of three persons. The firm wants to produce 100 units of output. Suppose that the price of capital is $750 per machine per week and that the weekly salary of each worker is $300. Which combination of inputs should the firm use?
c
w
5
15
Q* ( 𝑇𝐸1
$ 750 )=¿
TE1
=$750*5=$3750
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