ECO100Y5 Lecture Notes - Lecture 8: Isoquant, Tangent, Profit Maximization

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Short run: at least one factor is fixed (think capital, k) Long run: all inputs are variable (think k, l) Technical efficiency occurs when a given number of inputs are combined in such a way as to maximize the level of output. Common sense: given the inputs, produce the maximum output. To analyze profit maximizing decision, we break this into two parts. The ratio of marginal products equals the ratio of prices. If price for another good is low but its productivity is high, we should move to that good. If possible to substitute one factor for another and maintain quality while reducing costs, you should do it. The relation between cost minimization and profit maximization is true in short run as well but. Assuming technical efficiency, each l corresponds to a unique amount of quantity. An isoquant connects all technically efficient factor combinations for producing a given level.

Related Questions

A price taking firm chooses its inputs to maximize short-run profits. Its Cobb-Douglass production function has the following form: q(L, K) = L^(1/2) K ^(1/3) . The output price is 1,000 per unit and the cost of each unit of input is 10. In the short-run, capital is fixed at 27 units.

(a) Set up the profit function in terms of labor only.

(b) Find the optimal choice of labor, L â .

Another price taking firm chooses its inputs to maximize long-run profits. Labor and capital are substitutes in production and both exhibit decreasing returns to scale, q(L, K) = L^(1/2) + K^(1/2) . The output price is 100 and the price of each of the inputs is 10.

(a) Set up the firmâs profit function and provide the two conditions for profit maximization.

(b) Find the profit maximizing levels of capital and labor.

rosearmadillo753

A price taking firm chooses its inputs to maximize short-run profits. Its Cobb-Douglass production function has the following form: q(L, K) = L ^(1/2)K^(1/3) . The output price is 1,000 per unit and the cost of each unit of input is 10. In the short-run, capital is fixed at 27 units.

(a) Set up the profit function in terms of labor only.

(b) Find the optimal choice of labor, L* .

goldwildebeest627

constant costs

increasing returns to scale

constant returns to scale

isocost curve

decreasing returns to scale

isoquant

diseconomies of scale

long-run average cost

economies of scale

long-run marginal cost

economies of scope

marginal rate of technical substitution

expansion path

short-run expansion path

___A curve that displays all the various combinations of inputs that will produce a given amount of output.

___The rate at which one input is substituted for another along an isoquant.

___Line that shows all the possible combinations of inputs that can be purchased for a given total cost.

___A curve showing all of the cost-minimizing levels of input usage for various levels of output.

___When the usage of all inputs is increased by an equal proportionate amount, output ___increases by exactly the same proportion.

___When the usage of all inputs is increased by an equal proportionate amount, output increases by a larger proportionate amount.

___When the usage of all inputs is increased by an equal proportionate amount, output increases by a smaller proportionate amount.

___Cost per unit in the long run.

___The change in long-run total cost per unit change in output.

___When long-run average cost falls as output increases.

___When long-run average cost increases with increases in output.

___Long-run average and marginal costs are equal for all levels of output.

___The situation in which the joint cost of producing two goods is less than the sum of the separate costs of producing the two goods.

___Horizontal line showing the cost-minimizing input combinations for various output levels when capital is fixed in the short run.

aquamarineguinea-pig889

ECO100Y5 Lecture Notes - Lecture 8: Isoquant, Tangent, Profit Maximization

ECO100Y5 Full Course Notes

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