10 - Lecture notes 1.3 PDF

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This is regarding an assignment of share marketing appraisal...

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01. Short run is the time period where at least one factor of production (K/L) is fixed and a given technology. This period is generally less than or lies between four to six months. Long run is the time period where all factors of production of a firm are getting varied except technology. This is generally considered to be more than six months, Very long run is the time period where all factors of production are variable, and additional factors outside the control of the firm can change which are technology and government policy. This time period is generally more than several years.

02.

TP TP

K/L

0 AP/MP

Stage I

Stage II

Stage III

AP K/L

0 1

MP

Total production of the firm depends on labor which is the variable input. As the firms labor utilization increases TP increases up to a certain point and become stable before starting to decrease again. The main reason for this is the law of diminishing marginal returns of labor in the short run. The slope of the TP is MP. When the TP is increasing at an increasing rate MP also increases and reaches its maximum point. Further when TP increases at a decreasing rate MP starts to decline and reaches zero when TP is maximized. AP is the average quantity of output produced by one unit of labor. AP also increases up to a certain point, then reaches to its maximum point and starts to decline when labor input is increasing.

03. In short run, a firms optimal use of variable input is determined by MRP L = MRCL . It occurs where additional revenue that a producer can get by introducing an additional unit of labor to the production process equals change in the total cost from an introduction of an additional unit of labor to the production process.

04. Yes, I agree with this statement Combinations of two inputs that can produce the same level of output is shown by isoquants. Thus firms produce combinations of two inputs that are in the economic region of production, which is defined by the portion of each isoquant that is inversely sloped.

05. K

Equilibrium

Isoquant Iso-cost L

0 2

Optimal combination of two inputs is obtained when the iso-quant curve is tangent to the isocost curve. Where, MRTS = w/r

06.

Expansion path shows how a firm's cost minimizing input mix changes as it expands production. The points of tangency of the isocost lines and isoquants is traced out by expansion path. It provides a long-run view of a firm's production decision and it can also be used to create its long-run cost curves.

K

Expansion Path

L

0

3

07.

L

MPL

1 2 3 4 5 6

6 4 3 1 0

MR=P (P=200) 200 200 200 200 200 200

MRPL

MRCL

1200 8000 600 200 0

600 600 600 600 600 600

Thus, Marginal product for labor is 3. So, the optimal level of production is 63.

08. Perfect Substitutes K

B

0

A

L

If two inputs are perfect substitutes Iso Quant curves are straight lines with negative slope. At point A total output can be produced only using labor input and at the point B total output can be produced using only capital input.

4

Perfect Complements K

0

L

Iso Quant curves are right angle curves with 90` when resources are perfect compliments where all corners lie on a straight line through the origin.

5...