Chapter 6 Firms and Production
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Chapter 6
Firms and Production
© 2004 Pearson Addison-Wesley. All rights reserved 6-2
Table 6.1 Total Product, Marginal Product, and Average Product of Labor with Fixed Capital
© 2004 Pearson Addison-Wesley. All rights reserved 6-3
Figure 6.1 Production Relationships with Variable Labor
B
A
C
11640
L, Workers per day
Marginal product, MPL
Average product, APL
110
90
56
(a)
b
a
c
11640
L, Workers per day
20
15
(b)
Out
put,
q,
Uni
ts p
er d
ay
AP
L,
MP
L
© 2004 Pearson Addison-Wesley. All rights reserved 6-4
Table 6.2 Output Produced with Two Variable Inputs
© 2004 Pearson Addison-Wesley. All rights reserved 6-5
Figure 6.2 Family of Isoquants
e
b
a
d
fc
63210 L, Workers per day
6
3
2
1
q = 14
q = 24
q = 35
K,
Uni
ts o
f ca
pita
l per
day
© 2004 Pearson Addison-Wesley. All rights reserved 6-6
Figure 6.3 Substitutability of Inputs
(a)
x, Maine potatoes per day
q = 3q = 2q = 1
q = 1
(c)
L, Labor per unit of time
(b)
Cereal per day
q = 3
q = 2
q = 1
45° line
y, Id
aho
pota
toes
per
day
Box
es p
er d
ay
K, C
apita
l per
uni
t of t
ime
© 2004 Pearson Addison-Wesley. All rights reserved 6-7
Figure 6.3a Substitutability of Inputs
(a)
x, Maine potatoes per day
q = 3q = 2q = 1
y, I
daho
pot
atoe
s pe
r da
y
© 2004 Pearson Addison-Wesley. All rights reserved 6-8
Figure 6.3b Substitutability of Inputs
(b)
Cereal per day
q = 3
q = 2
q = 1
45° line
Bo
xes
per
day
© 2004 Pearson Addison-Wesley. All rights reserved 6-9
Figure 6.3c Substitutability of Inputs
q = 1
(c)
L, Labor per unit of time
K,
Cap
ital p
er u
nit
of t
ime
© 2004 Pearson Addison-Wesley. All rights reserved 6-10
Application (Page 164) Semiconductor Integrated Circuit Isoquants
Aligner
Stepper
Wafer-handling stepper
200 ten-layer chips per day isoquant
81 3
L, Workers per day
0
K,
Un
its o
f ca
pita
l pe
r d
ay
© 2004 Pearson Addison-Wesley. All rights reserved 6-11
Figure 6.4 How the Marginal Rate of Technical Substitution Varies Along an Isoquant
e
b
K = –18
–7
–4–2
L = 1
d
c
63
11
1
4 520 L, Workers per day
39
21
14
108
q = 10
a
K, U
nits
of c
apita
l per
day
© 2004 Pearson Addison-Wesley. All rights reserved 6-12
Application (Page 171) Returns to Scale in Manufacturing
© 2004 Pearson Addison-Wesley. All rights reserved
Application (Page 171) Returns to Scale in Manufacturing
q = 100q = 200q = 177
500400300200100 450350250150500
L, Units of labor per year
600
500
400
300
200
100
(a) Thread Mill: Decreasing Returns to Scale
q = 100 q = 200
500400300200100 450350250150500
L, Units of labor per year
600
500
400
300
200
100
(b) Shoe Factory: Constant Returns to Scale
q = 100q = 200
q = 251
500400300200100 450350250150500
L, Units of labor per year
600
500
400
300
200
100
(c) Concrete Blocks and Bricks: Increasing Returns to Scale
K, U
nits
of c
apita
l per
yea
rK
, Uni
ts o
f cap
ital p
er y
ear
K, U
nits
of c
apita
l per
yea
r
© 2004 Pearson Addison-Wesley. All rights reserved 6-14
Application (Page 171) Returns to Scale in Manufacturing
q = 100q = 200q = 177
500400300200100 450350250150500
L, Units of labor per year
600
500
400
300
200
100
(a) Thread Mill: Decreasing Returns to ScaleK
, Uni
ts o
f cap
ital p
er y
ear
© 2004 Pearson Addison-Wesley. All rights reserved 6-15
Application (Page 172) Returns to Scale in Manufacturing
q = 100 q = 200
500400300200100 450350250150500
L, Units of labor per year
600
500
400
300
200
100
(b) Shoe Factory: Constant Returns to Scale
K, U
nits
of c
apita
l per
yea
r
© 2004 Pearson Addison-Wesley. All rights reserved 6-16
Application (Page 172) Returns to Scale in Manufacturing
q = 100q = 200
q = 251
500400300200100 450350250150500
L, Units of labor per year
600
500
400
300
200
100
(c) Concrete Blocks and Bricks: Increasing Returns to ScaleK
, Uni
ts o
f cap
ital p
er y
ear
© 2004 Pearson Addison-Wesley. All rights reserved 6-17
41 2
a
b
d
c
a ® b: Increasing returns to scale
b ® c: Constant returns to scale
c ® d: Decreasing returns to scale
8 L, Work hours per year
4
2
1
0
8
q = 8
q = 6
q = 3q = 1
Figure 6.5 Varying Scale Economies
K, U
nits
of c
apita
l per
yea
r
© 2004 Pearson Addison-Wesley. All rights reserved 6-18
Table 6.3 Annual Rates of Productivity Growth
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