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L14

L14. Technology. 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 ( )

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L14

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  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 z L K

  4. Production function: Geometry z L K

  5. Production function: Geometry z L K

  6. Production function: Geometry z y 5 L 3 K

  7. Production function: Geometry f(K,L) y 5 L 3 K

  8. 3 Classic Examples Cobb-Douglass Fixed Proportions Perfect Substitutes

  9. 3 Classic Examples Cobb-Douglass Fixed Proportions Perfect Substitutes

  10. Marginal Product • MPK andMPL • Economic Interpretation of MPK – how much product goes up if K increases by 1 • MPL analogous but for L • Geometric Interpretation

  11. MPK Increasing, Constant, Decreasing? Cobb-Douglass More generally

  12. MPK Increasing, Constant, Decreasing? Fixed Proportions Perfect Substitutes

  13. Technical Rate of Substitution • TRS: slope of isoquant • Interpretation: • Formula:

  14. What’s new? • Long run and Short run ( fixed) • Monotone transformation? Nooooo! • Constant Returns to Scale (CRS) • Increasing (IRS), Decreasing (DRS)

  15. CRS: Geometry z 2z L K

  16. Marginal Product and Returns to Scale

  17. Marginal Product and Returns to Scale

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