Additional Slides for Chapters 4 and 5

1. Additional Slides for Chapters 4 and 5 Econ 3551-05Tony Lima

2. Additional Slides for Chapter 5 • The following four slides should be copied and pasted after slide 49 in chapter 5

3. 5.4 Note on Increasing Returns to Scale • Consider shipping. • The following slide shows basic information about a standard 20 foot shipping container. • The volume of one of these containers is 1,170.22 cubic feet. • The surface area is 722.8 square feet. • The capital input is proportional to the surface area, but output – the quantity of stuff that can be hauled – is proportional to volume. • Thus if we double the surface area we will more than double the volume. The new surface area is 1,445.61 and the new volume is 3,309.89.

6. 5.4 Conclusion: increasingreturns to scale • Any industry whose production can be characterized as output proportional to volume but input proportional to surface area should exhibit some increasing returns. • Increasing returns explain why shipping costs have fallen to almost nothing over the past 20 years. • Other industries that have increasing returns include chemicals and (of course) wine.

7. Additional Slides for Chapter 4 • The following four slides should be copied and pasted after slide 43 in chapter 4

8. Managerial Solution • Relocate from Seattle to London • Budget line in Seattle is Lsand buys s. Utility is I1. • Housing is relatively more expensive in London. • If worker is compensated when moving to afford s in London, budget line is LL. Worker consumes l and utility is I2. • Firm should compensate L*. worker consumes l* and utility is I1.