CHAPTER 7 Production Theory 191 FIGURE 77 Fixed-Proportions Production Function When soquants are at right angles, oF L-shaped, inputs rust be used in faxed proportions i production Thus, 10 unts of ouput (100) can only be produced at pont 2L and 1K Using more labor oF capital would not change output, 200 can only be produced wth AL and 2K (poet B), and 300 only with GL and 3K {pownt C) Thus, output can only be produced at the constant ot ‘nad capital-tabor ratio or proportion of K/L = 1/2 0 In general, the smaller the curvature stit ther in production. On the other hand, the g close ints to right angles, or L-shape), the more difficult able to easily substitute inputs in production is extremely important in the teal world. example. if petroleum had good substitutes, users could easily have switched to alterna tive energy sources when petroleum prices rose sharply in the fall of 1973. Their e bill would then not have risen very much. As it was, good substitutes were not readily fable (certainly not in the short run), and so most energy users faced sharply higher energy costs. AS Example 7-2 shows, gasoline and driving time can also be substituted for each other, and this can be shown by isoquants. e isoguta EXAMPLE 7-2 Trading Traveling Time for Gasoline Consumption on the Nation's Highways Higher automobile speed reduces the driving ime needed to covera given distance but aastoce was mileage and thus increases gasoline consumption. It has becn estimated That redeing the speed limit on the nation’s highways from 65 to $5 mph reduced tncoine consumption by about 3%. The trade-off between traveling ime and gasoline eaeeurption fr 4 6O0-mile trip can be represented by the isoquant shown in Figure Se imme figure, the vertical axis measures hours of traveling time, while the hor 7 Ur anienecagutes gallons of gasoline consumed. Gasoline nd travel time ae ths the inputs into the production of automobile transportation Thu icogoant in Figure 7.8 shows tha at SO mph, the 6O0 mies ean be covered in 12h ad with 16 gallons of gasoling, at 37.5 miles per gallon (point A), At 60 mph, the 600 miles can be covered in 10 hours and with 20 gallons of gasoline. at 30 miles ve aiton peint 8), Diving at 6D mph saves 2 hours of wavel time fone searee rea nereases gasoline consuription by 4 gallons (another searee resource), Fsenere trade-off or marginal rate of technical substitution (MRTS) of gasoline foe son pe berwecen point A and point on the isoquant in Figure 7.8 is 172. At 66.7 In oan iat the spec Timi is aove ithe 60D mies ean be covered in Pan 30 gallons of gasoline, at 20 miles per gallon (point C). Th Le eal + Band Cis 10. aadea inne Re192 75 PART THREE Production, Costs, and Competitive Markets A (50 MPH) y B (60 MPH) ZY C (66.7 MPH) =? 600 miles E 8 — ° 16 20 30 Gasoline (gallons) FIGURE 7.8 Speed Limit and Gasoline Consumption _Isoquant ABC shows the trade-off betwreen traveling time and gasoline consumption. At 50 MPH, 600 miles can be covered in 12 hours and vith 16 gallons of gasoline (point A), At GO MPH, the 600 miles can be covered in 10 hours and with 20 gallons of gasoline (point 8). At 66.7 MPH, 600 miles can be ‘covered in 9 hours with 30 gallons (point Cp. In order to determine the most economical (i.e., the least cost) combination of gasoline and travel time to cover the 600 miles, we need to know the price of gasoline and the value of time to the individual. This is addressed in the next chapter, where we take up costs of production. If the price of gasoline were to increase, the individual ‘would want to substitute traveling time for gasoline (i.., drive at a lower speed so as to increase gas mileage and save gasoline) to minimize the cost of traveling the 600 miles (see Example 8-3). Note that there is also a trade-off between travel speed and safety (ie., lower speeds increase travel time but save lives). Sources: Charles A. Lave, Speeding, Coordination, and the $5-mph Limit,” American Economic Review, December 1985, pp. 1159-1164: "Death Rate on U.S. Roads Reported at Record Low,” New York Times October 27,1998, p.16;"How Much Is Your Times Worth?" New York Ties, February 26, 2003. DI: “At$2 a Gallon, Gas Is Still Worth Guzalin," New York Times, May 16, 2004, Sect 4. p. 14: "Politi s Forcing Detroit to Support New Rules on Fuel," New York Times, June 20, 2007, p.A1; and "Can US. ‘Adopt Europe's Fuel-Efficient Cars?” Wall Steet Journal, June 26, 2007, p. Bl. CONSTANT, INCREASING, AND DECREASING RETURNS TO SCALE ‘The word “scale” refers to the long-run situation where all inputs are changed in the same proportion: The result might be constant, increasing, or decreasing returns. Constant returns to scale refers to the situation where output changes by the same proportion inputs. For example, if all inputs are increased by 10%, output also rises by 10%. If all inputs are doubled, output also doubles, Increasing returns to scale refers to the ¢2°°