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Definitions
•Total Product (TP): total output, Q.
•Marginal Product of L (MPL): additional
MPL
Q F K , L
L L
e.g.
1 1
QK L 2 2
1
1 12 12 1 K 2
MPL L K
2 2 L
1 1 1
K L 1
21
K
2 2
APL K L
2 2
L L
K L Q MPL APL
8 0 0 - -
8 1 5 5 5
8 2 18 13 9
8 3 36 18 12
8 4 56 20 14
8 5 75 19 15
8 6 90 15 15
8 7 98 8 14
8 8 104 6 13
8 9 108 4 12
8 10 110 2 11
8 11 110 0 10
8 12 108 -2 9
8 13 104 -4 8
Q
110
90
56
0 L
4 6 11
APL, MPL
20
15
APL
MPL
0 L
4 6 11
NB:
2. MPL > 0 ⇒ Q ↑
MPL < 0 ⇒ Q ↓.
1 1 Q
QK L 2 2
Q=10
K
Q=5
0 L
K
1 1
K L 10
2 2
1 1
K L 5
2 2
0 L
Returns to Scale
Isoquant Slopes
⇒ Q ↑ by (∆L) MPL
• ↓ K ⇒ MPK (< 0)
⇒ Q ↓ by (∆K) MPK
Rearranging yields:
(∆K) MPK = - (∆L) MPL
K MPL
MRTS
L MPK
Mathematically …
Q
MRTS L
Q
K
Measuring Costs
Definitions
FC
0 Q
Cost
MC ATC
AVC
AFC
0 Q
A: min. VC, AVC
MC = AVC
C: MC = AFC
rK C wL
C w
K L
r r
•At A:
w
MRTS
r
MPL w
MPK r
MPL MPK
w r
An Example Problem
*** Solution ⇒
MPL K
MRTS
MPK L
1 1
4L L
2 2
2L
∴ L* 18 K * 72
and hence,
C * 4 18 2 72
72 144
216
Expansion Path
4. Measuring costs
5. Costs in the SR