Professional Documents
Culture Documents
Marginal Productivity
The firms production function
For a particular good (q)
Shows the maximum amount of the good
that can be produced
Using alternative combinations of capital
(k) and labor (l)
q = f(k,l)
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9.1
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9.1
120,000l - 3000l2 = 0
40l = l2
l = 40
Labor input beyond l = 40 reduces output
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9.1
Isoquant Maps
Isoquant map
To illustrate the possible substitution of
one input for another
An isoquant
Shows those combinations of k and l that
can produce a given level of output (q0)
f(k,l) = q0
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10
9.1
An Isoquant Map
k per period
q = 30
kA
kB
q = 20
q = 10
lA
lB
l per period
11
q q0
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12
Along an isoquant dq = 0, so
MPl dl MPk dk
dk
RTS (l for k )
dl
q q0
MPl
MPk
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
13
14
dl
dl
[ f k ( f ll f lk dk / dl ) - f l ( f kl f kk dk / dl )]
( fk )2
( f k2 f ll - 2 f k f l f kl f l 2 f kk )
( f k )3
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15
16
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
17
9.2
A Diminishing RTS
Production function:
q = f(k,l) = 600k 2l 2 - k 3l 3
Marginal productivity functions:
MPl = fl = 1200k 2l - 3k 3l 2
MPk = fk = 1200kl 2 - 3k 2l 3
Will be positive for values of k and l for which kl
< 400
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
18
9.2
A Diminishing RTS
Because
fll = 1200k 2 - 6k 3l and fkk = 1200l 2 - 6kl 3
Diminishing marginal productivities for sufficiently
large values of k and l
fll and fkk < 0 if kl > 200
19
Returns to Scale
How does output respond to increases in
all inputs together?
Suppose that all inputs are doubled,
would output double?
20
Returns to Scale
Production function is given by q = f(k,l)
And all inputs are multiplied by the same
positive constant (t >1)
Then we classify the returns to scale of
the production function by
Effect on Output
Returns to Scale
f(tk,tl) = tf(k,l) = tq
f(tk,tl) < tf(k,l) = tq
f(tk,tl) > tf(k,l) = tq
Constant
Decreasing
Increasing
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21
Returns to Scale
Production function
Constant returns to scale for some levels
of input usage
Increasing or decreasing returns for other
levels
The degree of returns to scale is generally
defined within a fairly narrow range of
variation in input usage
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22
Returns to Scale
Returns to scale can be generalized to a
production function with n inputs
q = f(x1,x2,,xn)
If all inputs are multiplied by a positive
constant t:
f(tx1,tx2,,txn) = tkf(x1,x2,,xn)=tkq
If k = 1, constant returns to scale
If k < 1, decreasing returns to scale
If k > 1, increasing returns to scale
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23
Example:
Suppose : Q = AKL
To check for RTS:
Q = A(mK) (mL)
= AmKmL
= m+ (AKL)
= m+Q
Thus,
when +
=1
CRTS
+
<1
DRTS
+
> 1 IRTS
if Q = AK 4L 5
+ = 4 + 5 = 0.9 <1
Decreasing RTS!
Example:
let Q = 3L + 10K + 500
(i) Suppose L = K = 1
Q = 3(1) + 10(1) + 500 = 513
(ii) Lets double all inputs ie
L= K = 2
Q = 3(2) + 10(2) + 500 = 526
Whe all inputs are doubled, increase in output is
less than double!
The above production function exhibits DRTS!
Capital
(machine
hours)
The isoquants
move closer
together
4
30
20
2
10
5
10
Labor (hours
one another
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
30
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
k per period
q=3
q=2
q=1
l per period
Because a constant returns-to-scale production function is homothetic, the RTS depends
only on the ratio of k to l, not on the scale of production. Consequently, along any ray
through the origin (a ray of constant k/l), the RTS will be the same on all isoquants. An
additional feature is that the isoquant labels increase proportionately with the inputs.
31
Capital
(machine
hours)
2
A
6
30
4
2
0
2
Constant
Returns:
Isoquants are
equally spaced
10
5
10
5
15
5
Labor (hours)
Capital
(machine
hours)
Decreasing Returns:
Isoquants get further
apart
15
2
10
5
10
12
Labor (hours)
%RTS
dRTS k / l d ln RTS d ln( f1 / f k )
The value of will always be positive
because k/l and RTS move in the same
direction
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
35
9.3
Graphic Description of the Elasticity of Substitution
k per period
(k/l)A
RTSA
RTSB
B
q = q0
(k/l)B
l per period
In moving from point A to point B on the q = q 0 isoquant, both the capitallabor ratio
(k/l) and the RTS will change. The elasticity of substitution () is defined to be the
ratio of these proportional changes; it is a measure of how curved the isoquant is.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
36
Elasticity of Substitution
If is high
The RTS will not change much relative to k/l
The isoquant will be relatively flat
If is low
The RTS will change by a substantial
amount as k/l changes
The isoquant will be sharply curved
37
Elasticity of Substitution
Elasticity of substitution between two
inputs
The proportionate change in the ratio of
the two inputs
To the proportionate change in RTS
With output and the levels of other inputs
constant
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
38
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
39
9.4 (a)
(a) =
k per period
slope = - /
q1
q2
q3
l per period
Three possible values for the elasticity of substitution are illustrated in these
figures. In (a), capital and labor are perfect substitutes. In this case, the RTS will
not change as the capitallabor ratio changes.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
40
Fixed Proportions
Fixed proportions production function ( =
0):
q = min (k,l) , > 0
Capital and labor must always be used in
a fixed ratio
The firm will always operate along a ray
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
41
9.4 (b)
(b) = 0
k per period
q3
q3/
q2
q1
q3/
l per period
Three possible values for the elasticity of substitution are illustrated in these
figures.
In (b), the fixedproportions case, no substitution is possible. The capitallabor
ratio is fixed at /.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
42
43
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
44
9.4 (c)
k per period
(c) = 1
q=3
q=2
q=1
l per period
Three possible values for the elasticity of substitution are illustrated in these
figures.
A case of limited substitutability is illustrated in (c).
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
45
function
= 0 Cobb-Douglas production function
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
46
f k 1 (k / l ) -0.5
This function has a CES form ( = 0.5 and = 1)
Elasticity of substitution:
1
1
2
1 0.5
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
47
Technical Progress
Methods of production change over time
Following the development of superior
production techniques
The same level of output can be produced
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
48
9.5
Technical Progress
k per period
k2
k1
q0
q0
l1
l2
l per period
Technical progress shifts the q0 isoquant toward the origin. The new q0 isoquant,
q0, shows that a given level of output can now be produced with less input. For
example, with k1 units of capital it now only takes l1 units of labor to produce q0,
whereas before the technical advance it took l2 units of labor.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
49
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
50
f (k , l ) A
dt dt
dt
dA q
q f dk f dl
dt A f (k , l ) k dt l dt
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
51
q
A
f (k , l ) dt f (k , l ) dt
dA / dt f
k
dk / dt f
l
dl / dt
A
k f (k , l )
k
l f (k , l )
l
Gx - proportional growth rate in x, [(dx/dt)/x]
Write the equation in terms of growth rate
f
k
f
l
Gq GA
Gk
Gt
k f (k , l )
l f (k , l )
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
52
f
k
q k
eq ,k
k f (k , l ) k q
f
l
q l
eq ,l
l f (k , l ) l q
Growth equation:
Gq GA eq ,k Gk eq ,l Gl
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
53
9.4
q = Aetk l 1-
Taking logarithms and differentiating with respect
to t gives the growth equation
ln q ln q q q / t
(ln A t ln k (1 ) ln l )
Gq
t
q t
q
t
ln k
ln l
(1 )
Gk (1 )Gl
t
t
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
54
Many-input CobbDouglas: q x
i 1
i 1
i
i
i
i 1
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
55
i i
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
56
x4 x 1 x
Final production function Cobb Douglas :
qx x
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
57
q ij xi x j , where ij ji
i 1 j 1
58
ln q 0 i ln xi 0.5 ij ln xi ln x j , where ij ji
i 1
i 1 j 1
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
59