Question

In: Economics

Understand what is meant by a firm and what their primary goal is. Understand what is...

  • Understand what is meant by a firm and what their primary goal is.
  • Understand what is meant by a production function and understand what the typical shape (with only one input changing) implies about marginal productivity (and why MPl will usually initially increase and then decrease).
  • Understand the difference between the short run and the long run and how a short-run production function can be derived.
  • Understand what is meant by APL and what the relationship is between APL and MPL
  • Understand how isoquants can be used to represent technological constraint in the long run and what is true along each curve
  • Understand how to interpret the slope of an isoquant and what usually happens to it as we move along a given curve.
  • Understand the relationship between RTS and the Marginal products of the two inputs..
  • Understand the law of diminishing marginal product and diminishing MRTS and how they differ.
  • Understand the different returns to scale and why this is a long run concept and how you would determine if a production function exhibited increasing, decreasing or constant returns to scale.
  • Understand what is meant by the elasticity of substitution and how it varies for different production technologies.
  • Understand the shapes of different technologies ( perfect substitutes, perfect complements and Cobb-Douglas production function)
  • Understand the important characteristics of a Cobb Douglas production function and how changes in alpha and beta affect the MRTS and how to determine if it has constant, increasing or decreasing returns to scale.
  • Understand how to show both factor neutral technological progress and factor specific technological progress on the graph and how these differ.

Solutions

Expert Solution

Firm is a commercial enterprise which is involved in buying/ selling of goods and/or services with the aim of earning profits. Its primary goal is to maximixe the wealth of its owners.

Production function is a function which shows the relationship between quantities of inputs employed and quantities of outputs generated from them. When there is only one input changing (short term like), the production function shows a diminshing marginal returns to factor input. This means that initially eah unit of variable input added will lead to higher output but as the other input is fixed, after a certain level, there is excess of variable input as compared to the fixed input. Thus, initially it is rising, reachea its maximum and then starts falling.

Short run can be referred to the time period where atleast one factor input is invariable whereas in long run all the factor inputs can be changed. Example- it is difficult to change machinery in factory only after 6 months(short run) but it is doable in 4 years (long run).

APL is average product of labor calculated by dividing the total output by number of people employed.

APL = Output/L

MPL = Output/L

APL is rising as long as MPL > APL , APL cuts MPL from below and then falls as long as MPL < APL.

Isoquants are combinations of input that yield the same output level. The resulting output is constant along an isoquant.

Slope of isoquant = Marginal rate of technical substitution. when two inputs are L & K, the MRTS = K/L which is negative as movement along rhe curve would mean shift from one input to another.


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