【正文】 on, Inc. Chapter 6 45 Diminishing Returns Labor per year 1 2 3 4 5 Increasing labor holding capital constant (A, B, C) OR Increasing capital holding labor constant (E, D, C q1 = 55 q2 = 75 q3 = 90 1 2 3 4 5 Capital per year D E A B C 169。2020 Pearson Education, Inc. Chapter 6 60 A Production Function for Wheat ?Farmers can produce crops with different binations of capital and labor ?Crops in US are typically grown with capitalintensive technology ?Crops in developing countries grown with laborintensive productions ?Can show the different options of crop production with isoquants 169。2020 Pearson Education, Inc. Chapter 6 76 Returns to Scale: Carpet Industry Results 2. Small Manufacturers ? Small increases in scale have little or no impact on output ? Proportional increases in inputs increase output proportionally ? Constant returns to scale for small producers 169。2020 Pearson Education, Inc. Chapter 6 93 Fixed and Variable Costs ?Total output is a function of variable inputs and fixed inputs ?Therefore, the total cost of production equals the fixed cost (the cost of the fixed inputs) plus the variable cost (the cost of the variable inputs), or… V C FC TC ??169。2020 Pearson Education, Inc. Chapter 6 89 Sunk Cost ?Firm buys a piece of equipment that cannot be converted to another use ?Expenditure on the equipment is a sunk cost ?Has no alternative use so cost cannot be recovered – opportunity cost is zero ?Decision to buy the equipment might have been good or bad, but now does not matter 169。2020 Pearson Education, Inc. Chapter 6 72 Returns to Scale: Carpet Industry ? The carpet industry has grown from a small industry to a large industry with some very large firms ? There are four relatively large manufacturers along with a number of smaller ones ? Growth has e from ?Increased consumer demand ?More efficient production reducing costs ?Innovation and petition have reduced real prices 169。2020 Pearson Education, Inc. Chapter 6 56 Isoquants: Special Cases ? Two extreme cases show the possible range of input substitution in production 1. Perfect substitutes ? MRTS is constant at all points on isoquant ? Same output can be produced with a lot of capital or a lot of labor or a balanced mix 169。 1L (pt. A) OR 1K amp。2020 Pearson Education, Inc. Chapter 6 27 Production: One Variable Input ?From the previous example, we can see that as we increase labor the additional output produced declines ?Law of Diminishing Marginal Returns: As the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease 169。2020 Pearson Education, Inc. Chapter 6 14 Production: One Variable Input ? Observations: 1. When labor is zero, output is zero as well 2. With additional workers, output (q) increases up to 8 units of labor 3. Beyond this point, output declines ? Increasing labor can make better use of existing capital initially ? After a point, more labor is not useful and can be counterproductive 169。2020 Pearson Education, Inc. Chapter 6 3 Introduction ?Our study of consumer behavior was broken down into 3 steps: ?Describing consumer preferences ?Consumers face budget constraints ?Consumers choose to maximize utility ?Production decisions of a firm are similar to consumer decisions ?Can also be broken down into three steps 169。2020 Pearson Education, Inc. Chapter 6 19 Production: One Variable Input ?We can graph the information in Table to show ?How output varies with changes in labor ? Output is maximized at 112 units ?Average and Marginal Products ? Marginal Product is positive as long as total output is increasing ? Marginal Product crosses Average Product at its maximum 169。2020 Pearson Education, Inc. Chapter 6 32 The Effect of Technological Improvement Output 50 100 Labor per time period 0 2 3 4 5 6 7 8 9 10 1 A O1 C O3 O2 B Moving from A to B to C, labor productivity is increasing over time 169。2020 Pearson Education, Inc. Chapter 6 46 Production: Two Variable Inputs ?Substituting Among Inputs ?Companies must decide what bination of inputs to use to produce a certain quantity of output ?There is a tradeoff between inputs, allowing them to use more of one input and less of another for the same level of output 169。2020 Pearson Education, Inc. Chapter 6 61 A Production Function for Wheat ?Manager of a farm can use the isoquant to decide what bination of labor and capital will maximize profits from crop production ?A: 500 hours of labor, 100 units of capital ?B: decreases unit of capital to 90, but must increase hours of labor by 260 to 760 hours ?This experiment shows the farmer the shape of the isoquant 169。2020 Pearson Education, Inc. Chapter 6 77 Returns to Scale: Carpet Industry From this we can see that the carpet industry is one where: 1. There are constant returns to scale for relatively small plants 2. There are increasing returns to scale for relatively larger plants ? These are limited, however ? Eventually reach decreasing returns Chapter 7 The Cost of Production 169。2020 Pearson Education, Inc. Chapter 6 94 Fixed and Variable Costs ?Which costs are variable and which are fixed depends on the time horizon ?Short time horizon – most costs are fixed ?Long time horizon – many costs bee variable ?In determining how changes in production will affect costs, must consider if fixed or variable costs are affected. 169。2020 Pearson Education, Inc. Chapter 6 88 Measuring Cost: Which Costs Matter? ?Although opportunity costs are hidden and should be taken into account, sunk costs should not ?Sunk Cost ?Expenditure that has been made and cannot be recovered ?Should not influence a firm’s future economic decisions