Japan Industry Revolution free essay sample

Davidson CollegeMark C. Foley Department of EconomicsFall 2002 Principles of Economics Problem Set #4 Suggested Solutions Short Answers 1. Define isoquant. What is measured on the axes of a diagram with isoquants? What is the relationship between the isoquant map and the production function? An isoquant is a curve that shows all combinations of inputs that will produce the same level of output, provided that the inputs are used in a technologically efficient manner (i. e. it is the maximum output you can get for a combination of inputs (L,K)). The quantities of the two inputs (usually K and L in our examples, but they can be other inputs) are measured on the axes. The relationship is that an isoquant is a graphical representation of a production function such as Q = f(K,L,F). If we change the production function to be Q = g(K,L,F) then we’d get a different isoquant map. We will write a custom essay sample on Japan Industry Revolution or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 2. Isoquants are downward-sloping, non-intersecting, convex curves. Explain the basis for each of these characteristics. Isoquants must slope downward so long as each input is productive and has a positive marginal product. Hence, the only way to maintain constant output after increasing the quantity of one input is to decrease the quantity of the other. Isoquants cannot intersect. If they did, it would mean that the same combination of inputs produces two technically efficient (maximum) levels of output, which is not possible. Isoquants are convex because, as the first input becomes scarcer and the second input more abundant, it becomes ore difficult to substitute one input for another and keep output constant. That is, as you downward (to the right) along a convex isoquant, for one-unit increases in Labor, the decline in capital becomes less and less (since labor becomes less and less productive; diminishing MPL). Or similarly, as you move downward (to the right) along a convex isoquant, for one unit decreases in Capital, the increase in labor necessary to stay at the same production level is greater and greater (because of diminishing MPL). . For a particular combination of capital and labor we know that the marginal product of capital is 6 units of output and that the marginal rate of technical substitution is 3 units of capital per unit of labor. What is the marginal product of labor? MRTS = MPL/MPK so 3 = MPL/6 thus MPL = 18. 4. If a firm’s isoquants were straight lines, what would that imply about the two inputs? Is this realistic – give an example of why or why not? This would indicate that they are perfectly substitutable, which is not particularly realistic since for most products it typically takes at least some labor to make them, even if it’s just a person to maintain or program a machine. 5. If a firm’s isoquants were L-shaped, what would that imply about the two inputs? Is this realistic – give an example of why or why not? This would indicate that they are perfect complements and will be used in fixed proportions, which is more realistic since many production processes require a given ratio of L to K, such as 1 worker per 1 computer. One could also think of products for which 2 workers utilize one machine, or vice versa. Textbook Problems Applications Ch. 13 Problems 2 9 2. (a) The opportunity cost of something is what must be given up to acquire it. (b) The opportunity cost of running the hardware store is $550,000, consisting of $500,000 to rent the store and buy the stock and a $50,000 opportunity cost, since your aunt would quit her job as an accountant to run the store. Since the total opportunity cost of $550,000 exceeds revenue of $510,000, your aunt shouldn’t open the store since her profit would be negative. 9. Quantity |TVC |TFC |TC |AFC |AVC |ATC | |0 |0 |200 |200 | | | | |1 |10 |200 |210 |200 |10 |210 | |2 |20 |200 |220 |100 |10 |110 | |3 |40 |200 |240 |66. 7 |13. 3 |80 | |4 |80 |200 |280 |50 |20 |70 | |6 |320 |200 |520 |33. 3 |53. 3 |86. 7 | |7 |640 |200 |840 |28. 6 |91. 4 |120 | The efficient scale is 4 houses since that minimizes average total cost (ATC).