Econ chapter 5
Guiding the Production Process
Aligning incentives to induce maximum worker effort
Linear Isoquants
Capital and Labor are perfect substitutes, imply the inputs are substituted at a constant rate, independent of the input levels employed.
Leontief Isoquants
Capital and labor or perfect complements. Used in fixed proportions. No input substitution along isoquants, no marginal rate of substitution
Marginal Product on an input
Change in total output attributable to the last unit of input
Isoquant
Illustrates the long run combinations of (K,L) that yield the producer of same level output. The shape reflects the ease with which a producer can substitute among inputs while maintaining the same level of output.
Cobb Douglas Isoquants
Inputs are not perfectly substitute. Diminishing marginal rate of substitution. As less of one input is used in the production process increasingly more of the other input must be employed to produce the same level of output
When labor or capital vary in short run to amximize profit a manager will hire
Labor untill the value of marginal product of labor equals wage, capital until the value of marginal product of capital equals rental rate
Cost Minimization
Marginal product per a dollar spent should be equal on all inputs
Isocost
The combinations of inputs that produce a given level of output at the given level of output at the same cost. wL+rK=Cost. K=(1/r)C-(w/r)L. For given input prices prices further from the origin are associated with higher cost. Changes in input prices change the slope of the ___cost line.
Production function
The maximum amount of output that can be produced with K units of capital and L units of labor
Marginal Rate of Technical Substitution
The rate at which two inputs are substitute while maintaining the same output level
Linear Production Function
inputs are perfect substitutes.Q=F(K, L)=aK+bL
Leontief Production Function
inputs are used in fixed proportions. q= F(K,L)= min{bK,cL}
Cobb Douglas Production Function
inputs have a degree of substitutability
