Assumption consumer is rational maximize

utilitysubject tothebudget
constraint

Algebraicsolution solveoptimalconsumptionvalues X
dy
Use2equations CobbDouglas function
1MRS priceratio
2Budgetconstraint Is pXtpyYl UHy X yB
UHg s X y pet Py t 1 60
f
Process MRS
FindMRS
MRS Priceratio
Mrs Mµ I IT
g g I x

setMRSPriceratio Usebudgetconstraint
y
Ix 4 Is pxXtpyY
y I g x
Usebudgetconstraints at
60 20 Y Caffyn S X Ktp pi
Xy
y 10

changeinquantitydemanded
by changeinprice

Ep goftp DEp.Pq.dpQ willbea VEnumber

d

ELASTIC INELASTIC ISOELASTIC

lEpl I 1 10,1 1 DPI HEPKI 1 1014 1Pl sesameelasticityatallpoints

changeinquantitydemanded at a goodfrom a increase inprice of ANOTHER

EaxPy Yo Qp I Substitutes It Complements
ftp.x.fi
Ear ispositive BEaPy is negative
 L Masser MuftiF

a Wproductionfunction Q FCKLDfindMRTS
b Solvefor k and L thenplugit backintotheproduction function

4 Usesystemofequations to find L d k in terms of Q

d L d k into isocostfunction c rKtwL
Plug
b
CobbDouglas Q Laka G at a b
w bjw
Q fr

Totalcosts TC Fixed costs FC 1 Variablecosts VC

A ATC AFC t AVC
TGI
Y
AMarginal cost Mls Dgp DVI
Dq
Given TCQ 1000t 50Q t 10Q2
FC 1000
VCs50Q t 10Q2 AVG 50t 10Q
AC II 1000 50 t 10Q
Q Q
MC dTUQ1 1000 t 50Q 10Q2 50 t 20Q
dQ
Minimumof ALis when AGMC
1000,0 50t 10Q s 50 t 20Q

Lb Q
 Ecs 4,848 450 4
Echl East Ec I
McCAC MEAL AC MC
biseconomies of
Economies at scale
scale
Increasing RTs constant RTS Decreasing RTs

Tosolve Q 2k Ll
Example
Double14Lintheproductionfunction
Compareoutputwith
theoriginaloutput
1 1214211 I
214242121122112 20
42 2144124
thanDOUBLE Increasing
More 3 ownstantreturnsofscale
constant
ExactlyDOUBLE
thanDOUBLE Decreasing
Less

INCREASING CONSTANT DECREASING

K L L

y y
i ii
l
5
l
to L 5
i10 L
l
5
l
10
L