Chapter 6 Firms and Production

© 2004 Pearson Addison-Wesley. All rights reserved6-2 Table 6.1 Total Product, Marginal Product, and Average Product of Labor with Fixed Capital

© 2004 Pearson Addison-Wesley. All rights reserved6-3 Figure 6.1 Production Relationships with Variable Labor B A C L, Workers per day Marginal product,MP L Average product,AP L (a) b a c L, Workers per day (b) Output, q, Units per day AP L, MP L

© 2004 Pearson Addison-Wesley. All rights reserved6-4 Table 6.2 Output Produced with Two Variable Inputs

© 2004 Pearson Addison-Wesley. All rights reserved6-5 Figure 6.2 Family of Isoquants e b a d f c 63210L, Workers per day q = 14 q = 24 q = 35 K, Units of capital per day

© 2004 Pearson Addison-Wesley. All rights reserved6-6 Figure 6.3 Substitutability of Inputs (a) x, Maine potatoes per day q = 3q = 2q = 1 q (c) L, Labor per unit of time (b) Cereal per day q = 3 q = 2 q = 1 45° line y, Idaho potatoes per day Boxes per day K, Capital per unit of time

© 2004 Pearson Addison-Wesley. All rights reserved6-7 Figure 6.3a Substitutability of Inputs (a) x, Maine potatoes per day q = 3q = 2q = 1 y, Idaho potatoes per day

© 2004 Pearson Addison-Wesley. All rights reserved6-8 Figure 6.3b Substitutability of Inputs (b) Cereal per day q = 3 q = 2 q = 1 45° line Boxes per day

© 2004 Pearson Addison-Wesley. All rights reserved6-9 Figure 6.3c Substitutability of Inputs q = 1 (c) L, Labor per unit of time K, Capital per unit of time

© 2004 Pearson Addison-Wesley. All rights reserved6-10 Application (Page 164) Semiconductor Integrated Circuit Isoquants Aligner Stepper Wafer-handling stepper 200 ten-layer chips per day isoquant 813 L, Workers per day 0 K, Units of capital per day

© 2004 Pearson Addison-Wesley. All rights reserved6-11 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 L, Workers per day q = 10 a K, Units of capital per day

© 2004 Pearson Addison-Wesley. All rights reserved6-12 Application (Page 171) Returns to Scale in Manufacturing

© 2004 Pearson Addison-Wesley. All rights reserved Application (Page 171) Returns to Scale in Manufacturing q =100 q = 200 q = L, Units of labor per year (a) Thread Mill: Decreasing Returns to Scale q =100 q = L, Units of labor per year (b) Shoe Factory: Constant Returns to Scale q =100 q = 200 q = L, Units of labor per year (c) Concrete Blocks and Bricks: Increasing Returns to Scale K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved6-14 Application (Page 171) Returns to Scale in Manufacturing q =100 q = 200 q = L, Units of labor per year (a) Thread Mill: Decreasing Returns to Scale K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved6-15 Application (Page 172) Returns to Scale in Manufacturing q =100 q = L, Units of labor per year (b) Shoe Factory: Constant Returns to Scale K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved6-16 Application (Page 172) Returns to Scale in Manufacturing q =100 q = 200 q = L, Units of labor per year (c) Concrete Blocks and Bricks: Increasing Returns to Scale K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved a b d c a ® b: Increasing returns to scale b ® c: Constant returns to scale c ® d: Decreasing returns to scale 8L, Work hours per year q = 8 q = 6 q = 3 q =1 Figure 6.5 Varying Scale Economies K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved6-18 Table 6.3 Annual Rates of Productivity Growth