Long Run Production and Costs

At the tangency, where slope of the isocost line is equal to the slope of the isoquant, -w/r =

-MPI/MPk or MPI/w = MPk/r where the bangs per buck are equal

What is the equation of the isocost line?

C = wL + rK or Y=mX+b form K = C/r - (w/r) * L where C/r is the Y-intercept and -w/r is the slope

LRTC =

C = wL* + rK*

What do higher isoquants depict?

Higher levels of output (increased kapital/labor)

then LRATC is falling

If LRMC < LRATC

then LRATC is constant

If LRMC = LRATC

LRATC is rising

If LRMC > LRATC

LMC lies below LAC when

LAC is falling

Diseconomies of scale are present when

LAC is increasing

LMC lies above LAC when

LAC is rising

LMC equals LAC at

LAC's minimum value

Economies of scale

LRATC falls as output (scale) rises

If LRMC > LRATC then

LRATC is rising

Diseconomies of scale

LRATC rises as output (scale) rises

LRATC =

LRTC / Q

As in the short run, the ATC curve is intersected by

MC at its minimum

The absolute value of the slope of the isoquant (MRTS) is:

MPI/MPK

What is the convex nature of the isoquant (whatever tf convex means)

The rate at which the firm can substitute labor for capital falls, the less capital the firm has, holding output constant.

What does MRTS measure?

The rate at which the two inputs can be substituted for another along an isoquant while maintaining a constant level of output

What is the shape of LRATC

U shaped

What does a firm's isoquant map depict?

a series of isoquants, each one depicting a different level of output.

Expansion path is derived for

a specific set of input prices, w and r

An isoquant is a curve showing....

all possible combinations of capital and labor capable of producing a given level of output

An isoquant is a curve showing

all possible input combinations capable of producing a given level of output

What predicts different combos of K and L that produce the same level of output?

an Isoquant

LRMC =

dLRTC / dQ

What does the isocost line depict?

different combinations of K and L for which total cost is the same

Rising LRATC indicates

diseconomies of scale

Falling LRATC indicates

economies of scale

When LAC is decreasing,

economies of scale are present

Economies of Scope

exist for a multi-product firm when the joint cost of producing two or more goods is less than the sum of the separate costs for specialized, single product firms produce the two goods LRTC (X,Y) < LRTC (X,0) + LRTC (0,Y)

For equal increments in labor the firm is able to give up ...

fewer and fewer units of capital while still keeping output constant.

Higher isoquants indicate...

higher levels of output

isoquants are downward sloping because

if greater amounts of labor are used, less capital is required to produce a given output, and the slope diminishes along the curve

Expansion path gives the efficient...

input combinations for every level of output

Along expansion path,

input-price ration (w/r) is constant and equal to the marginal rate of technical substitution (at tangency)

The MRTS is the slope of an ______ and measures the ______

isoquant; rate at which the two inputs can be substituted for one another while maintaining a constant level of output

Economies of scope arise when firms produce....

join products or when firms employ common inputs in production

The firm will increase usage of the input that has become relatively

less expensive, in order to minimize the cost of producing a given amount of output.

The long run total cost of producing goods X and Y jointly is ____ than the LRTC of producing ________ the LRTC of producing ________

less; just X plus; just Y

Because managers possess thee greatest flexibility in choosing long run inputs,

long run costs are lower than short run costs for all output levels EXCEPT for which thee short run fixed input is at its optimal level

what is capital (K)?

machinery

Economies of scale and economies of scope are two reasons often sited as justifications for?

mergers/acquisitions of another firm(s)

The firm will decrease usage of the input that has become relatively

more expensive, in order to minimize the cost of producing a given amount of output

Constant LRATC indicates

neither economies or diseconomies of scale

Visually the firm wants to be where?

on thee highest isoquant just tangent to the desired cost (budget)

Maximizing output for a given level of expenditure requires choosing an input combination that?

satisfies the exact same conditions as for minimizing costs

Isoquants are used to...

study production decisions

As the firm moves down along the isoquant, substituting labor for capital...

the MTRS is diminishing - this gives rise to the convex nature of the isoquant

Marginal Rate of Technical Substitution (MRTS)

the absolute value of the slope of an isoquant

At each each tangency you have...

the cost minimizing input combination of capital and labor for the given input prices

LRATC or long run average cost measures...

the cost per unit of output when production can be adjusted so that the optimal amount of each input is employed

As the firm moves down along this shittily drawn curve K | | | | | \ | \ | - -- Q0 --------------------------L

the firm gives up K, adding L, in order to keep output constant at Qo (negative slope)

If MPI/w > MPk/r and its not at tangency, then

the firm should increase labor and reduce capital, doing so would reduce cost of producing given output

The slope of the isoquant diminishes as...

the firm substitutes labor for capitala (diminishing MRTS)

Minimize total cost of producing a given quantity of output by choosing....

the input combination on the isoquant that is just tangent to an isocost curve

What happens to the isocost line when wage has increased from Wo to W1, when C and r are constant?

the isocost line rotates inwards (less labor is able to be bought by the firm when it spends nothing on capital and w has increased)

What happens to the isocost line when r decreases from ro to r1 and C and w are constant?

the isocost lne would rotate up along the K axis. (more capital can be bought by the firm if it spends nothing on labor and the cost of capital has fallen)

The isocost curve's slope is

the negative of the input price ratio

The expansion path shows what?

the optimal or efficient input combination for every level of output; Lon run cost curves are made from the expansion path

Isocost curves show

the various combinations of inputs that may be purchased for a given level of expenditure at given input prices i.e. how much a firm can spend on labor given how much it spends on machinery and given how much those two cost

If LRMC = LRATC

then LRATC is constant

If LRMC < LRATC

then LRATC is falling

If MPI/w < MPk/r

then the firm should increasee capital and reduce labor, doing so would reduce the cost of producing the given output

Higher isocost lines correspond to higher

total costs of production.

In the long run, all inputs are...

variable

In the long run, all fixed inputs become

variable inputs