Production Flashcards
How can we tell whether a function is convex or concave?
You can look at the area above/below the function - i.e. if the area above is convex, then the function is convex (happy face graph) and if the area below is convex, then the function is concave (sad face graph).
Also, If you find the slopes of the tangent line between two points, you can understand convexity/concavity. If the slopes are increasing, then the function s convex and if the slopes are decreasing, then the area is concave.
What is the law of diminishing returns (production)?
This law states that if you continue to increase input while keeping everything else fixed, then eventually you will reach a point in which the returns from output will get smaller.
(e.g. a farmer hiring more workers to work the same area of land).
If MPL>MRS, what should Robinson Crusoe do?
It would make sense for him to consume less leisure and work more as his utility in working (gathering coconuts) exceeds the utility that he gets from doing nothing.
In the initial RC economy slides, why is moving up and to the left preferred?
This is because we need the input to be along the x-axis (which in this case is labour). The consumer would obviously prefer less labour and more output (coconuts) and so that is why the indifference curves show a preference to the left and up.
As a consumer, when is RC’s optimal choice achieved?
When MPL = MRS.
Find the following:
(optimal consumption)
You want to find max utility.
-Consumption = production function in RC.
Find the optimal value of labour.
- Sub back into production function to get optimal consumption.
What is an isoprofit line?
This is the line that shows the combinations of two or more variables that produce the same amount of profit for a firm.
In lecture example of RC, where RC is the firm, isoprofit line is composed of coconuts (output) and labour (input).
C = pi + w*L
Output level (coconuts) = profit + wage multiplied by labour, where the slope is w and y-intercept is pi.
Now, I can find profit-maximising bundles.
What is RC’s budget constraint as a consumer?
C= pi (profit, but in consumer case initial endowment) + (wage*labour hours).
When does the market clear in a RC economy?
When MRS (consumer) = MP
Note : MRS = was does MP = w.
The marginal product of labour for RC Inc has to be tangent to isoprofit line as well as the indifference curve of consumer RC.
What is a production possibilities frontier?
This tells you how much of each output you can get, given the technology that you use and the inputs you have at your disposal.
What is the marginal rate of transformation?
How do you calculate it?
Keeping the technology and input factors constant, this is the amount of one good you are giving up in producing so that you can produce another good.
By finding the slope of the production possibilities frontier.
In terms of picking between producers, how should i order my preference?
You should do this via their respective MRT’s. The lower the MRT, the higher they should be on your preference list and also the first one you turn to. This is because they are not giving up a lot of the production of the other good in order to satisfy your needs. You can still get the other goods by utilising the other producers.
What may be some causes of non-convexities in production sets?
- You might not be able to divide one input (i.e. to collect a lot of fish, you may have to buy a bulk of fishing nets which would maximise budget constraint).
- Might only be possible to hire labour full-time or not at all.
- Externalities may occur. This is when the production of one good may negatively harm the utility that you get from the other good.
When should agents (with constant MRT’s) produce good 1, taking into account their price ratios?
When their p1/p2 is greater than MRT.
If MRT is less than the price ratio, then agents should produce good 2.
