Summary Outline Chapter 6

Useful Practice Questions from End-of-Chapter are:

Discussion Questions 1, , !a, "-#, 1-1$
Pro%lems !-6, 1&, 11, 1! 16, 1#
'lso, sol(e 'ppendi) Question $ *1-" are +ood also %ut may re,uire
constrained optimi-ation.
1 Startin+ De/nitions 0 Concepts
De/ne /)ed input, (aria%le input, short run, 0 lon+ run
1hat is a production function2
3t can %e e)pressed as an e,uation, ta%le, or +raph
Production 4unction 5ith One 6aria%le 3nput
De/ne 7otal Product, '(era+e Product, 8ar+inal Product
1hen does 7otal Product reach its ma)imum (alue2
1hen does '(era+e Product reach its ma)imum (alue2
E)plain the 9'(era+e-8ar+inal: rule
;e(ie5 4i+ure 6-!
1hat is the <a5 of Diminishin+ 8ar+inal ;eturns2
1hy does it hold2
! Optimal Use of a Sin+le 6aria%le 3nput
De/ne the 8ar+inal ;e(enue Product *8;P. for the (aria%le input
3f the /rm is in a competiti(e industry so it is a price ta=er, de/ne the
8;P
De/ne the 8ar+inal ;esource Cost *8;C. for the (aria%le input
3f the /rm can %uy as many inputs as desired 5ithout chan+in+ the
input price, de/ne the 8;C
E)plain 5hy the optimal pro/t-ma)imi-in+ use of the input re,uires that
8;P > 8;C for the (aria%le input
" Optimal Use of 8ultiple 3nputs
4or the case of (aria%le inputs capital ? and <a%or <:
3f one is tryin+ to minimi-e the total cost of producin+ speci/ed output
le(el@ or,
8a)imi-e output from a +i(en %ud+et for %uyin+ inputs@
or,
8a)imi-e pro/ts su%Aect to input prices and price of
output made
7hen, the =ey e,uili%rium condition that must hold is
8P<B 5 > 8P?Br
Ce a%le to e)plain the economic si+ni/cance of each side of that e,uation
and 5hy the e,uality must hold
$ ;eturns to Scale
De/ne Constant ;eturns to Scale
3ncreasin+ ;eturns to Scale
Decreasin+ ;eturns to Scale
E)plain the diDerence %et5een Diminishin+ ;eturns and ;eturns to Scale
1hich is a short-run concept 0 5hich is a lon+-run concept2
;e(ie5 Case Study 6- and understand 5hy one 5ould e)pect to /nd that
most industries in a 5ell functionin+ economy sho5 nearly constant returns
to scale
6 Empirical Production 4unctions
1e 5ill use the Co%%-Dou+las production function
Q > '?
a
<
%
Sol(e for 8ar+inal Product <a%or and sho5 that it e)hi%its diminishin+ returns
Sol(e for 8ar+inal Product Capital and sho5 that it e)hi%its diminishin+
returns
Sho5 that is sum of e)ponents *aE%. > 1 then constant returns to scale
F1 then increasin+ returns to scale
G 1 then decreasin+ returns to scale