Chapter Eighteen: Technology

Chapter Eighteen
Technology
Technologies
 A technology is a process by which inputs

are converted to an output.
 E.g. labor, a computer, a projector,
electricity, and software are being
combined to produce this lecture.
Technologies
 Usually several technologies will produce

the same product -- a blackboard and
chalk can be used instead of a computer
and a projector.
 Which technology is “best”?
 How do we compare technologies?
Input Bundles
 xi denotes the amount used of input i; i.e. the level
of input i.
 An input bundle is a vector of the input levels; (x1,
x2, … , xn).
 E.g. (x1, x2, x3) = (6, 0, 93).
Production Functions
 y denotes the output level.

 The technology’s production function
states the maximum amount of output
possible from an input bundle.
y  f ( x1 ,  , xn )
Production Functions
One input, one output
Output Level y = f(x) is the
production
y’ function.
y’ = f(x’) is the maximal
output level obtainable
from x’ input units.
x’ x
Input Level
Technology Sets
 A production plan is an input bundle and an output
level; (x1, … , xn, y).
 A production plan is feasible if
y  f ( x1 ,  , xn )
 The collection of all feasible production plans is the
technology set.
Technology Sets
Output Level y = f(x) is the
production
y’ function.
y’ = f(x’) is the maximal
output level obtainable
from x’ input units.
y” y” = f(x’) is an output level
that is feasible from x’
input units.
x’ x
Input Level
Technology Sets
The technology set is
T  {( x1 ,, xn , y) | y  f ( x1 ,, xn ) and

x1  0, , xn  0}.
Technology Sets
Output Level
y’
The technology
set
y”
x’ x
Input Level
Technology Sets
Output Level
Technically
y’ efficient plans
The technology
y” Technically set
inefficient
plans
x’ x
Input Level
Technologies with Multiple
Inputs
 What does a technology look like when
there is more than one input?
 The two input case: Input levels are x1
and x2. Output level is y.
 Suppose the production function is
1/ 3 1/ 3
y  f ( x1 , x 2 )  2x1 x 2 .
Inputs
 E.g. the maximal output level possible from the input
bundle
(x1, x2) = (1, 8) is
1/ 3 1/ 3 1/ 3 1/ 3
y  2x1 x 2  2  1  8  2  1  2  4.
 And the maximal output level possible from (x1,x2) =
(8,8) is
1/ 3 1/ 3 1/ 3 1/ 3
y  2x1 x 2  2  8  8  2  2  2  8.
Inputs
Output, y
x2
(8,8)
(8,1)
x1
Inputs
 The y output unit isoquant is the set of all
input bundles that yield at most the same
output level y.
Isoquants with Two Variable
x
Inputs
2
y 
y 
x1
Inputs
 Isoquants can be graphed by adding an
output level axis and displaying each
isoquant at the height of the isoquant’s
output level.
Inputs
Output, y
y 
x2 y 
x1
Inputs
 More isoquants tell us more about the
technology.
x
Inputs
2
y 
y 
y 
y 
x1
Inputs
Output, y
y 
y 
x2 y 
y 
x1
Inputs
 The complete collection of isoquants is the isoquant
map.
 The isoquant map is equivalent to the production
function -- each is the other.
 E.g.
1/ 3 1/ 3
y  f ( x1 , x2 )  2 x1 x2
Inputs x
2
y
x1
Inputs
x1
Cobb-Douglas Technologies
 A Cobb-Douglas production function is of the

form
a1 a 2 an
y  A x1 x 2  xn .
 E.g.
1/ 3 1/ 3
with
y  x1 x 2
1 1
n  2, A  1, a1  and a 2  .
3 3
x2 All isoquants are hyperbolic,

asymptoting to, but never
touching any axis.
a1 a 2
y  x1 x 2
x1

touching any axis.
a1 a 2
y  x1 x 2
a1 a 2
x1 x 2  y"
x1

touching any axis.
a1 a 2
y  x1 x 2
a1 a 2
x1 x 2  y"
a1 a 2
x1 x 2  y'
x1

touching any axis.
a1 a 2
y  x1 x 2
y" > y'
a1 a 2
x1 x 2  y"
a1 a 2
x1 x 2  y'
x1
Fixed-Proportions
Technologies
 A fixed-proportions production function is
of the form
y  min{ a1 x1 , a 2x 2 , , an xn }.
 E.g.
y  min{ x1 , 2x 2 }
with
n  2, a1  1 and a 2  2.
Fixed-Proportions
Technologies
y  min{ x1 , 2x 2 }
x2
x1 = 2x2
7 min{x1,2x2} = 14
4 min{x1,2x2} = 8
2 min{x1,2x2} = 4
4 8 14 x1
Perfect-Substitutes
Technologies
 A perfect-substitutes production function
is of the form
y  a 1 x 1  a 2x 2    a n x n .
 E.g.
y  x1  3x 2
with
n  2, a1  1 and a 2  3.
Perfect-Substitution
Technologies y  x1  3x 2
x2 x1 + 3x2 = 18
x1 + 3x2 = 36
x1 + 3x2 = 48
8
6
All are linear and parallel
3
9 18 24 x1
Marginal (Physical) Products
y  f ( x1 ,  , xn )
 The marginal product of input i is the rate-of-change
of the output level as the level of input i changes,
holding all other input levels fixed.
 That is,
y
MPi 
 xi
E.g. if
1/ 3 2 / 3
y  f ( x1 , x 2 )  x1 x 2
then the marginal product of input 1 is
E.g. if
1/ 3 2 / 3
y  f ( x1 , x 2 )  x1 x 2
 y 1  2/ 3 2/ 3
MP1   x1 x 2
 x1 3
E.g. if
1/ 3 2 / 3
y  f ( x1 , x 2 )  x1 x 2
 y 1  2/ 3 2/ 3
MP1   x1 x 2
 x1 3
and the marginal product of input 2 is
E.g. if
1/ 3 2 / 3
y  f ( x1 , x 2 )  x1 x 2
 y 1  2/ 3 2/ 3
MP1   x1 x 2
 x1 3
and the marginal product of input 2 is
 y 2 1/ 3  1/ 3
MP2   x1 x 2 .
 x2 3
Typically the marginal product of one
input depends upon the amount used of
other inputs. E.g. if
1  2/ 3 2/ 3
MP1  x1 x 2 then,
3
1  2/ 3 2/ 3 4  2/ 3
if x2 = 8, MP1  x1 8  x1
3 3
and if x2 = 27 then
1  2/ 3 2/ 3  2/ 3
MP1  x1 27  3x1 .
3
 The marginal product of input i is

diminishing if it becomes smaller as the
level of input i increases. That is, if
 MPi   y  2
 y
     0 .
 xi  xi   xi   xi2
1/ 3 2 / 3
E.g. if y  x1 x 2 then
1  2/ 3 2/ 3 2 1/ 3  1/ 3
MP1  x1 x 2 and MP2  x1 x 2
3 3
1/ 3 2 / 3
1  2/ 3 2/ 3 2 1/ 3  1/ 3
MP1  x1 x 2 and MP2  x1 x 2
3 3
so  MP1 2  5 / 3 2/ 3
  x1 x 2  0
 x1 9
1/ 3 2 / 3
1  2/ 3 2/ 3 2 1/ 3  1/ 3
MP1  x1 x 2 and MP2  x1 x 2
3 3
so  MP1 2  5 / 3 2/ 3
  x1 x 2  0
 x1 9
and
 MP2 2 1/ 3  4 / 3
  x1 x 2  0.
 x2 9
1/ 3 2 / 3
1  2/ 3 2/ 3 2 1/ 3  1/ 3
MP1  x1 x 2 and MP2  x1 x 2
3 3
so  MP1 2  5 / 3 2/ 3
  x1 x 2  0
 x1 9
and
 MP2 2 1/ 3  4 / 3
  x1 x 2  0.
 x2 9
Both marginal products are diminishing.
Returns-to-Scale
 Marginal products describe the change in

output level as a single input level
changes.
 Returns-to-scale describes how the output
level changes as all input levels change in
direct proportion (e.g. all input levels
doubled, or halved).
Returns-to-Scale
If, for any input bundle (x1,…,xn),
f (kx1 , kx 2 , , kxn )  kf ( x1 , x 2 , , xn )
then the technology described by the
production function f exhibits constant
returns-to-scale.
E.g. (k = 2) doubling all input levels
doubles the output level.
Returns-to-Scale
Output Level
y = f(x)
2y’
Constant
y’ returns-to-scale
x’ 2x’ x
Input Level
Returns-to-Scale
f (kx1 , kx 2 , , kxn )  kf ( x1 , x 2 , , xn )
then the technology exhibits diminishing
returns-to-scale.
E.g. (k = 2) doubling all input levels less
than doubles the output level.
Returns-to-Scale
Output Level
2f(x’) y = f(x)
f(2x’)
Decreasing
f(x’) returns-to-scale
x’ 2x’ x
Input Level
Returns-to-Scale
f (kx1 , kx 2 , , kxn )  kf ( x1 , x 2 , , xn )
then the technology exhibits increasing
returns-to-scale.
E.g. (k = 2) doubling all input levels
more than doubles the output level.
Returns-to-Scale
Output Level
Increasing y = f(x)
returns-to-scale
f(2x’)
2f(x’)
f(x’)
x’ 2x’ x
Input Level
Returns-to-Scale
 A single technology can ‘locally’ exhibit

different returns-to-scale.
Returns-to-Scale
Output Level
y = f(x)
Increasing
returns-to-scale
Decreasing
returns-to-scale
x
Input Level
Examples of Returns-to-Scale
The perfect-substitutes production
function is
y  a 1 x 1  a 2x 2    a n x n .
Expand all input levels proportionately
by k. The output level becomes
a1 (kx1 )  a 2 (kx 2 )    an (kxn )
function is
y  a 1 x 1  a 2x 2    a n x n .
a1 (kx1 )  a 2 (kx 2 )    an (kxn )
 k( a1x1  a 2x 2    anxn )
function is
y  a 1 x 1  a 2x 2    a n x n .
a1 (kx1 )  a 2 (kx 2 )    an (kxn )
 k( a1x1  a 2x 2    anxn )
 ky.
function exhibits constant returns-to-scale.
The perfect-complements production
function is
y  min{ a1 x1 , a 2x 2 ,  , an xn }.
min{ a1 (kx1 ), a 2 (kx 2 ),  , an (kxn )}
function is
y  min{ a1 x1 , a 2x 2 ,  , an xn }.
min{ a1 (kx1 ), a 2 (kx 2 ),  , an (kxn )}
 k(min{ a1x1 , a 2x 2 ,  , anxn })
function is
y  min{ a1 x1 , a 2x 2 ,  , an xn }.
min{ a1 (kx1 ), a 2 (kx 2 ),  , an (kxn )}
 k (min{ a1x1 , a 2x 2 ,  , anxn })
 ky.
function exhibits constant returns-to-scale.
The Cobb-Douglas production function is
y  x1a1 x a2 2  xn
an
.
by k. The output level becomes (Mở rộng
tất cả các mức đầu vào theo tỷ lệ k. Mức
sản lượng trở thành)
(kx1 ) a1 (kx 2 ) a 2 (kxn ) an

y  x1a1 x a2 2  xn
an
.
a1 a2 an
(kx1 ) (kx 2 ) (kxn )
a1 a 2 an a1 a 2 an
 k k k x x x
y  x1a1 x a2 2  xn
an
.
(kx1 ) a1 (kx 2 ) a 2 (kxn ) an
 k a1k a 2 k an x a1 x a 2 x an
 k a1  a 2  an x1a1 x a
2
2 x an
n
y  x1a1 x a2 2  xn
an
.
(kx1 ) a1 (kx 2 ) a 2 (kxn ) an
 k a1k a 2 kan x a1 x a 2 x an
 k a1  a 2  an x1a1 x a
2
2 x an
n
 k a1  an y.
y  x1a1 x a2 2  xn
an
.
(kx1 ) a1 (kx 2 ) a 2 (kxn ) an  k a1  an y.
The Cobb-Douglas technology’s returns-

to-scale is
constant if a1+ … + an = 1
y  x1a1 x a2 2  xn
an
.

to-scale is
increasing if a1+ … + an > 1
y  x1a1 x a2 2  xn
an
.

to-scale is
increasing if a1+ … + an > 1
decreasing if a1+ … + an < 1.
Returns-to-Scale
 Q: Can a technology exhibit increasing

returns-to-scale even though all of its
marginal products are diminishing?
Returns-to-Scale
 Q: Can a technology exhibit increasing

returns-to-scale even if all of its marginal
products are diminishing?
 A: Yes.
 E.g.
2/ 3 2/ 3
y  x1 x 2 .
Returns-to-Scale
2/ 3 2/ 3 a1 a 2
y  x1 x 2  x1 x 2
4 so this technology exhibits

a1  a 2   1
3 increasing returns-to-scale.
Returns-to-Scale
2/ 3 2/ 3 a1 a 2
y  x1 x 2  x1 x 2
4
a1  a 2   1 so this technology exhibits
3 increasing returns-to-scale.
2  1/ 3 2/ 3
But MP1  x1 x 2 diminishes as x
3 1
increases
Returns-to-Scale
2/ 3 2/ 3 a1 a 2
y  x1 x 2  x1 x 2
4
a1  a 2   1 so this technology exhibits
3
increasing returns-to-scale.
2  1/ 3 2/ 3
But MP1  x1 x 2 diminishes as x1
3
increases and
2 2 / 3  1/ 3
MP2  x1 x 2 diminishes as x1
3
increases.
Returns-to-Scale
 So a technology can exhibit increasing

returns-to-scale even if all of its marginal
products are diminishing. Why?
Returns-to-Scale
 A marginal product is the rate-of-change of output
as one input level increases, holding all other input
levels fixed.
 Marginal product diminishes because the other
input levels are fixed, so the increasing input’s units
have each less and less of other inputs with which to
work.
Returns-to-Scale
 When all input levels are increased proportionately,
there need be no diminution of marginal products
since each input will always have the same amount
of other inputs with which to work. Input
productivities need not fall and so returns-to-scale
can be constant or increasing.
Technical Rate-of-
Substitution
 At what rate can a firm substitute one
input for another without changing its
output level?
Technical Rate-of-
Substitution
x2
x'2
y
x'1 x1
Technical Rate-of-
Substitution The slope is the rate at which
x2 input 2 must be given up as
input 1’s level is increased so as
not to change the output level.
The slope of an isoquant is its
x'2 technical rate-of-substitution.
y
x'1 x1
Technical Rate-of-
Substitution
 How is a technical rate-of-substitution computed?
Technical Rate-of-
Substitution
 How is a technical rate-of-substitution computed?
 The production function is
 A small change (dx1, dx2) in the input bundle causes a
change to the output level of y  f ( x , x ).
1 2
y y
dy  dx1  dx 2 .
 x1  x2
Technical Rate-of-
Substitution
y y
dy  dx1  dx 2 .
 x1  x2
But dy = 0 since there is to be no change

to the output level, so the changes dx1
and dx2 to the input levels must satisfy
y y
0 dx1  dx 2 .
 x1  x2
Technical Rate-of-
Substitution
y y
0 dx1  dx 2
 x1  x2
rearranges to
y y
dx 2   dx1
 x2  x1
so dx 2  y /  x1
 .
dx1  y /  x2
Technical Rate-of-
Substitution
dx 2  y /  x1

dx1  y /  x2
is the rate at which input 2 must be given

up as input 1 increases so as to keep
the output level constant. It is the slope
of the isoquant.
Technical Rate-of-Substitution; A
Cobb-Douglas Example
a b
y  f ( x1 , x 2 )  x1 x 2
so  y a1 b y a b 1
 ax1 x 2 and  bx1 x 2 .
 x1  x2
The technical rate-of-substitution is
a1 b
dx 2  y /  x1 ax1 x 2 ax 2
   .
dx1  y /  x2 bx1a xb2  1 bx1
x2 1 2
1/ 3 2 / 3
y  x1 x 2 ; a  and b 
3 3
ax 2 ( 1 / 3) x 2 x2
TRS    
bx1 ( 2 / 3 ) x1 2x1
x1
1/ 3 2 / 3 1 2
x2 y  x1 x 2 ; a  and b 
3 3
ax 2 ( 1 / 3) x 2 x2
TRS    
bx1 ( 2 / 3 ) x1 2x1
x2 8
TRS     1
8 2x1 2 4
4 x1
1/ 3 2 / 3 1 2
y  x1 x 2 ; a  and b 
x2 3 3
ax 2 ( 1 / 3) x 2 x2
TRS    
bx1 ( 2 / 3 ) x1 2x1
x2 6 1
TRS    
2x1 2  12 4
6
12 x1
Well-Behaved Technologies
 A well-behaved technology is
 monotonic, and
 convex.
Well-Behaved Technologies -
Monotonicity
 Monotonicity: More of any input
generates more output.
y y
monotonic
not
monotonic
x x
Convexity
 Convexity: If the input bundles x’ and x”
both provide y units of output then the
mixture tx’ + (1-t)x” provides at least y
units of output, for any 0 < t < 1.
Convexity
x
2
x'2
x"2
y
x'1 x"1 x1
Convexity
x
2
x'2
 tx'1  (1  t )x"1 , tx'2  (1  t )x"2 

x"2
y
x'1 x"1 x1
Convexity
x
2
x'2
 tx'1  (1  t )x"1 , tx'2  (1  t )x"2 

x"2 y
y
x'1 x"1 x1
Convexity
x Convexity implies that the TRS
2
increases (becomes less
x'2 negative) as x1 increases.
x"2
x'1 x"1 x1
Well-Behaved Technologies
x2 higher output
y
y y
x1
The Long-Run and the Short-
Runs
 The long-run is the circumstance in which
a firm is unrestricted in its choice of all
input levels.
 There are many possible short-runs.
 A short-run is a circumstance in which a
firm is restricted in some way in its choice
of at least one input level.
Runs
 Examples of restrictions that place a firm
into a short-run:
 temporarily
being unable to install, or
remove, machinery
 being required by law to meet affirmative
action quotas
 having to meet domestic content
regulations.
Runs
 A useful way to think of the long-run is
that the firm can choose as it pleases in
which short-run circumstance to be.
Runs
 What do short-run restrictions imply for a firm’s
technology?
 Suppose the short-run restriction is fixing the level
of input 2.
 Input 2 is thus a fixed input in the short-run. Input 1
remains variable.
x
Runs 2
y x1
Runs
x1
Runs
x1
Four short-run production functions.

Runs
1/ 3 1/ 3
y  x1 x 2 is the long-run production
function (both x1 and x2 are variable).
The short-run production function when
x2  1 is y  x1 / 3 11 / 3  x1 / 3 .
1 1
The short-run production function when

x2  10 is y  x11 / 3 101 / 3  2  15x11 / 3 .
Runs
y  x11 / 3 101 / 3
y  x11 / 3 51 / 3
y  x11 / 3 21 / 3
y
y  x11 / 3 11 / 3
x1
Four short-run production functions.

Chapter Eighteen: Technology

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Chapter Eighteen: Technology

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Chapter Eighteen

 A technology is a process by which inputs

 Usually several technologies will produce

 y denotes the output level.

T  {( x1 ,, xn , y) | y  f ( x1 ,, xn ) and

 A Cobb-Douglas production function is of the

x2 All isoquants are hyperbolic,

x2 All isoquants are hyperbolic,

x2 All isoquants are hyperbolic,

x2 All isoquants are hyperbolic,

 The marginal product of input i is

 Marginal products describe the change in

 A single technology can ‘locally’ exhibit

(kx1 ) a1 (kx 2 ) a 2 (kxn ) an

(kx1 ) a1 (kx 2 ) a 2 (kxn ) an  k a1  an y.

The Cobb-Douglas technology’s returns-

(kx1 ) a1 (kx 2 ) a 2 (kxn ) an  k a1  an y.

The Cobb-Douglas technology’s returns-

(kx1 ) a1 (kx 2 ) a 2 (kxn ) an  k a1  an y.

The Cobb-Douglas technology’s returns-

 Q: Can a technology exhibit increasing

 Q: Can a technology exhibit increasing

4 so this technology exhibits

 So a technology can exhibit increasing

But dy = 0 since there is to be no change

is the rate at which input 2 must be given

 tx'1  (1  t )x"1 , tx'2  (1  t )x"2 

 tx'1  (1  t )x"1 , tx'2  (1  t )x"2 

Four short-run production functions.

The short-run production function when

Four short-run production functions.

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