Chapter 5 appendix PP Flashcards
isoquant curves
a line along which different combinations of capital (K) and Labour (L) yield the same quantity of output
downward sloping
convex
They cannot intersect
curvyyyy
what happens when either K or L decreases but output remains the same? (using the isoquant curves)
since it is an isoquant curve,
Marginal rate of technical substitution (slope of the isoquant):
- MPL / MPK
what is the formula that demonstrates that quantity demanded in the short run?
Q = f(L, K-)
This means that capital is constant in the shirt run, the only thing that can be changed is labor
how to find MPL?
MPL = fa)L^(a-1))*(K^b)
ooor
W/P
what is the assumption with MPL = W/P?
it explains why labor decreases as wage increases
that labor is hired until labor’s MPL = W/P
MPL declines as employment is increased
bases for the assertion that a firm’s short-run demand curve for labor slopes downward
where do firms maximize profits?
by producing at a level of output (Q*) where MC = MR
For a competitive firm, MR is equal to output/product price, that is, P = MR
isoexpenditure lines
the expenditure on L and K is constant along any given isoexpenditure line
its the costs of using a certain amount of labour and capital inputs
on one line, you can decrease (increase) labor inputs and increase (decrease) capital inputs and expenses will remain the same
Slope of the isoexpenditure line is
- W/C
how do you find the cost minimizing ration of K and L?
the cost minimizing point
MRTS = - MPL / MPK
= - W/C
true or false
the cost of producing extra output by adding K should equal the cost of producing extra output by adding L
true
Delta K / Delta Q · C
= Delta L / Delta Q · W
substitution effect generated by the wage increase in the long run
reduction of employment because we can replace it with capital inputs in the long run
before the scale effect
scale effect generated by the wage increase in the long run
after substitution effect
reduce overall quantity produced
reduce both Labour outputs and capital outputs
The isoquants of a production function for which the inputs are perfect substitutes are straight lines
true or false
truuue
