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Describing Technology

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

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Describing Technology

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  1. 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 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

  2. Isoquants

  3. Isoquants and Cost Minimization

  4. 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

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