Download presentation

Presentation is loading. Please wait.

Published byLeticia Blanchard Modified over 2 years ago

1
Economics 202: Intermediate Microeconomic Theory 1.Should be through Chapter 12 (Chapter 14, Monopoly is next) 2.HW on website, due Tue in class

2
Numerical Example of Long-run Input Demand Consider a monopolist with production function Q = L ½ K ½ and facing D-curve P = 36 - Q, and competitive input prices w = $4, r = $16 K LaborTC* 4 TC* 16 K* = 5 Q L* = 20 1. Find L*,K* in terms of w,r, & Q. Set MRTS = ratio of the input prices The cost-minimizing input levels for any level Q are L* = r ½ w -½ Q K* = w ½ r -½ Q 2. What is the optimal level of Q? Profits are maximized when MR = MC Use Total Revenue Marginal Revenue Use Total Cost = wL + rK Marginal Cost Set MR = MC 36-2Q = 2w ½ r ½ 36-2Q = 2. 4 ½. 16 ½ Q* = 10 3. Use answer from (1) to find L*, K*, TC* L*= 20, K*= 5, TC*= 4(20)+16(5)= $160 = 10

3
Numerical Example of Long-run Input Demand Now suppose that because of a new union contract the w rises to $9. How do the optimal L*,K* change? K LaborTC* 4 TC* 16 5 Q = 10 20 7.5 13.3 Isolate the SE. K is relatively cheaper so substitute toward K, keeping Q at 10. L* = r ½ w -½ Q K* = w ½ r -½ Q L se = r ½ w -½ Q = (4/3)10 = 13.3 K se = w ½ r -½ Q = (3/4)10 = 7.5 TC at this L se & K se goes up: TC = $9(13.3) + $16(7.5) = $240 NB: this is less than if they didn’t economize on the more-expensive L TC = $9(20) + $16(5) = $260 Is MR still = MC? No. 36-2Q = 2w ½ r ½ 36-2(10) < 2(3)(4) SE

4
Numerical Example of Long-run Input Demand What is the new -max level of output? 36-2Q = 2(3)(4) Q* new = 6 units K Labor 5 Q* = 10 20 7.5 13.38 4.5 ScE Q* new = 6 What is the cost-minimizing way to produce any level of Q? Recall L* = r ½ w -½ Q K* = w ½ r -½ Q L* = (4/3)6 = 8, K* = (3/4)6 = 4.5 Scale effect of a wage increase is to decrease production level (Q), which means the firm needs less K and less L. Effect L K Original 20 5 Subst Effect-6.7+2.5 Scale Effect-5.3-3.0 Final Point 8 4.5

5
Gross Complements or Substitutes For labor, the SE and the ScE reinforce one another D-curve for labor is downward-sloping. That’s good. Price of Input j Quantity of Input j D0D0 Gross Complements Shock: Price of Input i Wage Labor D 4 $9 2013.38 D1D1 +2.5 -3.0 For capital, the SE and the ScE work in opposite directions. If we Price of input i: SE > ScE Gross Substitutes SE < ScE Gross Complements (notice that blue and yellow make green, actually that was total coincidence )

6
Gross Complements or Substitutes More than 2 inputs –Categories of L & K, energy, raw materials/supplies Cost-minimizing condition still same: W skill /MP skill = W unskill /MP unskill = r/MP K If two inputs i and j are substitutes in production, they can be Gross Substitutes or Gross Complements If we Price of input i: SE > ScE Gross Substitutes SE < ScE Gross Complements Snow-removal firm: let j = skilled workers If two inputs i and j are complements in production, they must be Gross Complements (no SE, only ScE) Price of Input j Quantity of Input j D0 Gross Substitutes Gross Complements Shock: Price of Input i

7
Competitive Firm Example Assume firm operates in a perfectly competitive output market and perfectly competitive input markets Let Q = f(K,L) = K 1/3 L 1/3 Find unconditional factor demand functions and firm supply curve. Comparative statics

Similar presentations

OK

Questions: (1) Where do the labor demand and supply curves come from? (2) How well do they explain the facts?

Questions: (1) Where do the labor demand and supply curves come from? (2) How well do they explain the facts?

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on linked list in java Ppt on revolt of 1857 Ppt on number system for class 9th Ppt on astronomy and astrophysics Free ppt on mobile number portability solutions Download ppt on mind controlled robotic arms made Ppt on wireless integrated network sensors Ppt on boilers operations research Ppt on conservation of water in hindi Ppt on pi in maths draw