Professional Documents
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CH 05
CH 05
Production
2
Production Functions
q f ( K , L, M )
3
Two-Input Production Function
q f ( K , L)
4
Application 5.1: Everyone is a Firm
5
Application 5.1: Everyone is a Firm
6
Marginal Product
7
Marginal Product
8
Diminishing Marginal Product
9
FIGURE 5.1: Relationship between Output and
Labor Input Holding Other Inputs Constant
Output Total
per week Output
L* Labor input
10 (b) Marginal product per week
Diminishing Marginal Product
11
Marginal Product Curve
12
Average Product
13
Appraising the Marginal Product
Concept
14
APPLICATION 5.2: Why Do the Japanese
Have a Cost Advantage in Making Cars?
15
APPLICATION 5.2: Why Do the Japanese
Have a Cost Advantage in Making Cars?
16
APPLICATION 5.2: Why Do the Japanese
Have a Cost Advantage in Making Cars?
17
Isoquant Maps
18
Isoquant Map
19
FIGURE 5.2: Isoquant Map
Capital
per week
KA
A
KB
B q = 10
0 LA LB Labor
per week
20
Isoquant Map
21
FIGURE 5.2: Isoquant Map
Capital
per week
KA
A
q = 30
q = 20
KB
B q = 10
0 LA LB Labor
per week
22
Isoquant Map
23
Rate of Technical Substitution
25
Rate of Technical Substitution
26
The RTS and Marginal Products
27
Diminishing RTS
28
APPLICATION 5.3: Engineering and
Economics
29
FIGURE 1: Construction of an Isoquant
from Engineering Data
K per
period A
B
a
C
b c
q0
L per period
30
APPLICATION 5.3: Engineering and
Economics
31
APPLICATION 5.3: Engineering and
Economics
32
Returns to Scale
33
Returns to Scale
35
FIGURE 5.3: Isoquant Maps showing Constant,
Decreasing, and Increasing Returns to Scale
A
Capital
per week
4
q = 40
3
q = 30
2
q = 20
1
q = 10
0 1 2 3 4 per Labor
week
(a) Constant Returns to Scale
36
Decreasing Returns to Scale
37
FIGURE 5.3: Isoquant Maps showing Constant,
Decreasing, and Increasing Returns to Scale
A Capital A
Capital
per week per week
4 4
q = 40
3 3 q = 30
q = 30
2 2
q = 20 q = 20
1 1
q = 10 q = 10
0 1 2 3 4 per weekLabor 0 1 2 3 4 Labor
per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
38
Increasing Returns to Scale
39
FIGURE 5.3: Isoquant Maps showing Constant,
Decreasing, and Increasing Returns to Scale
A Capital A
Capital
per week per week
4 4
q = 40
3 3 q = 30
q = 30
2 2
q = 20 q = 20
1 1
q = 10 q = 10
0 1 2 3 4 per Labor 0 1 2 3 4 Labor
week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
Capital A
per week
4
3
q = 40
2 q = 30
q = 20
1
q = 10
0 1 2 3 4 Labor
40 per week
(c) Increasing Returns to Scale
APPLICATION 5.4: Returns to Scale in
Beer Brewing
41
APPLICATION 5.4: Returns to Scale in
Beer Brewing
42
APPLICATION 5.4: Returns to Scale in
Beer Brewing
43
APPLICATION 5.4: Returns to Scale in
Beer Brewing
44
Input Substitution
45
Fixed-Proportions Production
Function
46
Fixed-Proportions Production
Function
47
FIGURE 5.4: Isoquant Map with Fixed
Proportions
Capital A
per week
K2 q2
K1 q1
K0 q0
0 L0 L1 L2 Labor
per week
48
Fixed-proportions Production
Function
49
The Relevance of Input
Substitutability
50
Changes in Technology
51
Changes in Technology
52
FIGURE 5.5: Technical Change
Capital
per week
K1
K0
A
q0
q’0
0 L1 L0 Labor
53 per week
54
Technical Progress versus Input
Substitution
55
Technical Progress versus Input
Substitution
56
APPLICATION 5.5: Multifactor
Productivity
57
APPLICATION 5.5: Multifactor
Productivity
58
APPLICATION 5.5: Multifactor
Productivity
59
TABLE 1: Annual Average Change in Output
per Hour in Manufacturing
60
TABLE 2: Annual Average Change in
Multifactor Productivity Manufacturing
61
A Numerical Example
62
A Numerical Example
63
TABLE 5.1: Hamburger Production Exhibits
Constant Returns to Scale
64
Average and Marginal
Productivities
65
TABLE 5.2: Total Output, Average Productivity,
and Marginal Productivity with Four Grills
Grills (K) Workers (L) Hamburgers per Hour (q) q/L MPL
4 1 20.0 20.0 -
4 2 28.3 14.1 8.3
4 3 34.6 11.5 6.3
4 4 40.0 10.0 5.4
4 5 44.7 8.9 4.7
4 6 49.0 8.2 4.3
4 7 52.9 7.6 3.9
4 8 56.6 7.1 3.7
4 9 60.0 6.7 3.4
4 10 63.2 6.3 3.2
66
Average and Marginal
Productivities
67
The Isoquant Map
69
TABLE 5.3: Construction of the q = 40
Isoquant
Grills
(K)
10
q = 40
1 4 10 Workers
(L)
71
Technical Progress
73
FIGURE 5.6: Technical Progress in
Hamburger Production
Grills
(K)
10
q = 40 after invention
q = 40
1 4 10 Workers
(L)
74