Chapter 18Technology.ppt

Examples of technology (isoquants analysis): Fixed proportions, Perfect substitutes, Cobb-Douglas. Figs. p322 The technical rate of substitution (TRS): With d y = 0 along any isoquant, TRS (x1, x2 ) = d x2 / d x1 = – MP1 (x1, x2) / MP2 (x1, x2 ). The organization of firms: Proprietorships, partnerships, corporations. SR profit maximization π= py - w1x1 - w2x2 y = π/ p + w2x2 / p + w1x1 / p describes isoprofit lines, max x1π gives pMP1 = w1. Fig. p337 P324 Comparative statics: Increasing p increases x1 and then y. Increasing w1 reduces x1, and thus the factor demand curve follows. LR: both x1 and x2 are variable. Figs. * * Chapter 18 Technology Inputs and outputs. Factors of production:  land, labor, capital,  raw materials,  and so on. Y = f (X ) = production function Y = Output X = Input Production set A production set p321 Isoquants x1 x2 Fixed proportion Isoquants x1 x2 Perfect subsitutes Assumptions of technology: monotonic (free disposal), and convex. p324 (a1/2 + b1/2 , a2/2 + b2/2) isoquant x1 x2 a2 b2 a1 b1 The marginal product, MPi = d y / d x i . Y is output The long run (LR) and the short run (SR) Returns to scale: Increasing, decreasing, and constant: f ( t x ) t f ( x )= Chapter 19 Profit Maximization Isoprofit lines slope = w1/p y = f (x1, x2) Production function x1 x1* Output y* π/p+w2x2/p Profit maximization Optimum lies on the tangency of an isoprofit line and the production function.  *