Transcript Managerial Economics in a Global Economy

Total Product
Marginal Product
Average Product
Production or
Output Elasticity
TP = Q = f(L)
TP
MPL =
L
TP
APL =
L
MPL
EL = AP
L
Total, Marginal, and Average Product of Labor, and Output Elasticity
L
0
1
2
3
4
5
6
Q
0
3
8
12
14
14
12
MPL
3
5
4
2
0
-2
APL
3
4
4
3.5
2.8
2
EL
1
1.25
1
0.57
0
-1
Marginal Revenue
Product of Labor
MRPL = (MPL)(MR)
Marginal Resource
Cost of Labor
TC
MRCL =
L
Optimal Use of Labor MRPL = MRCL
Use of Labor is Optimal When L = 3.50
L
2.50
3.00
3.50
4.00
4.50
MPL
4
3
2
1
0
MR = P
$10
10
10
10
10
MRPL
$40
30
20
10
0
MRCL
$20
20
20
20
20
Isoquants show combinations of two inputs
that can produce the same level of output.
Firms will only use combinations of two
inputs that are in the economic region of
production, which is defined by the portion
of each isoquant that is negatively sloped.
Isoquants
Economic
Region of
Production
Marginal Rate of Technical Substitution
MRTS = -K/L = MPL/MPK
MRTS = -(-2.5/1) = 2.5
Perfect Substitutes
Perfect Complements
Isocost lines represent all combinations of
two inputs that a firm can purchase with
the same total cost.
C  wL  rK
C  Total Cost
w  Wage Rateof Labor ( L)
C w
K  L
r r
r  Cost of Capital ( K )
MRTS = w/r
Production Function Q = f(L, K)
Q = f(hL, hK)
If  = h, then f has constant returns to scale.
If  > h, then f has increasing returns to scale.
If  < h, the f has decreasing returns to scale.
Constant
Returns to
Scale
Increasing
Returns to
Scale
Decreasing
Returns to
Scale
Cobb-Douglas Production Function
Q = AKaLb
Estimated using Natural Logarithms
ln Q = ln A + a ln K + b ln L