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L14 Technology.

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Presentation on theme: "L14 Technology."— Presentation transcript:

1 L14 Technology

2 Technology Producers: have a technology
A technology - a process converting inputs to an output Typical Inputs: labor, physical and human capital, land, R&D, marketing capital To make our life simpler: only two inputs capital ( ) and labor ( ) Technology given by production function

3 Production function: Geometry
L z All bundles in I1 are strictly preferred to all in I2. K

4 Production function: Geometry
L z All bundles in I1 are strictly preferred to all in I2. K

5 Production function: Geometry
L z All bundles in I1 are strictly preferred to all in I2. K

6 Production function: Geometry
5 L 3 z All bundles in I1 are strictly preferred to all in I2. K

7 Production function: Geometry
f(K,L) y 5 L 3 All bundles in I1 are strictly preferred to all in I2. K

8 3 Classic Examples Cobb-Douglass Fixed Proportions Perfect Substitutes

9 Marginal Product MPK and MPL
Economic Interpretation of MPK – how much product goes up if K increases by 1 Geometric Interpretation MPL analogous but for L

10 MPK Increasing, Constant, Decreasing?
Cobb-Douglass More generally

11 MPK Increasing, Constant, Decreasing?
Fixed Proportions Perfect Substitutes

12 Technical Rate of Substitution
TRS: slope of isoquant Interpretation: Formula:

13 What’s new? Long run and Short run ( fixed)
Monotone transformation? Nooooo! Returns to Scale (Idea)

14 Returns to scale Constant Returns to Scale (CRS)
Increasing (IRS), Decreasing (DRS)

15 CRS: Geometry L 2z z K All bundles in I1 are
strictly preferred to all in I2. K

16 Marginal Product and Returns to Scale

17 Marginal Product and Returns to Scale


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