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firm behavior
answer
Thinking on the firm side of supply and demand
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Diminishing marginal returns
answer
Production function is concave: the production function flattens because eventually every extra unit of x is going to have less of an impact on y
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Average product
answer
Output per input. Draw a line from a point on the origin to the product function.
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Marginal product
answer
For every extra unit of x, how much is y impacted?
- slope of the production function at any given point.
- slope of the production function at any given point.
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Decreasing marginal product
answer
increasing amount of some inputs (variable inputs) during the production period while holding other inputs constant (fixed inputs) will eventually lead to decreasing productivity.
Ex: fixed capital and increase in labor= too many workers with too little machines
Ex: fixed capital and increase in labor= too many workers with too little machines
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Markings pull averages
answer
If you take 3 tests and your average is 60 and your next test you score a 50 (marginal score is below average) your average decreases
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Isoquant
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Sibling to indifference curve
- all different combinations of inputs that give the same level of output
MRTS
- all different combinations of inputs that give the same level of output
MRTS
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slope of isoquant
answer
Marginal Rate of Technical Substitution (MRTS)
Sibling to consumers MRS
- how much the firm is willing to sacrifice K in order to get one additional unit of L (keeping output constant)
Sibling to consumers MRS
- how much the firm is willing to sacrifice K in order to get one additional unit of L (keeping output constant)
question
isocost line
answer
Sibling to budget line
C=wL+rK
Where c= total cost, w=wage rate, L=labor, r= rental cost of capital, K=capital
C=wL+rK
Where c= total cost, w=wage rate, L=labor, r= rental cost of capital, K=capital
question
Slope of iso cost line
answer
-wage rate/rental rate
- relative prices of two inputs
MRT
- relative prices of two inputs
MRT
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Optimal input mix
answer
MRTS=MRT
Isoquant is tangent to isocost
Isoquant is tangent to isocost
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Most output
answer
As you jump to a higher isoquant line (further from the origin) you get more output
-reallocate how much K and L you use (jumping to higher Isoquant) for the same cost (isocost) to get more output
It can be feasible (intersect), but not optimal (tangent at highest curve possible), so you should jump.
-reallocate how much K and L you use (jumping to higher Isoquant) for the same cost (isocost) to get more output
It can be feasible (intersect), but not optimal (tangent at highest curve possible), so you should jump.
question
Same input mix
answer
- maximize output for a given cost level
- minimize cost (multiple isocost) for a given output level (1 Isoquant)
- minimize cost (multiple isocost) for a given output level (1 Isoquant)
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Lower cost of capital
answer
Labor stays the same but the price of capital decreases so you can consume more. In this case the iso cost line rotates
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Isocost line rotation
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In cases of shocking change the iso cost line with rotate ( you can see as the y intercept changes)
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Isoquant being a constant line
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K and L are perfect substitutes : one unit of labor will produce same level of output as capital.
It is straight because MRTS is constant.
It is straight because MRTS is constant.
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Corner solutions
answer
Only seen with perfect substitutes
100% labor and 0% capital
The cost of capital can decrease and the iso cost line will rotate but despite the fact that the price decrease we will still use 100% labor because they're perfect substitutes
100% labor and 0% capital
The cost of capital can decrease and the iso cost line will rotate but despite the fact that the price decrease we will still use 100% labor because they're perfect substitutes
question
right angled isoquant
answer
K and L are perfect compliments
- inputs have to be used in a fixed proportion
One pilot=one plane
As the cost of K decreases the isocost line tortaria and we use more labor and more capital
Here they are interior solutions
- inputs have to be used in a fixed proportion
One pilot=one plane
As the cost of K decreases the isocost line tortaria and we use more labor and more capital
Here they are interior solutions
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