Daniel l. Rubinfeld

More documents

Recommendations

Info

202 Part 2 Producers, Consumers, and Competitive Markets 7. Can a firm ha\"e a production function that exhibits increasing returns to scale, constant returns to scale, and decreasing returns to scale at different scales of production as output increases Discuss, 8. Give an example of a production process in which the short rWl uwolves a day or a week, and the long run any period longer than a week 1. Suppose a chair manufacturer is producing in the short nm when equipment is fixed, The manufacturer knows that as the number of laborers used in the production process increases from 1 to 7, the number of chairs produced changes as follows: 10, 17, 22, 25, 26, 25,23, a. Calculate the average and marginal product of labor for this production function, b. Does this production function exhibit diminishing rehlrns to labor Explain, c. Explain intuitively what might cause the marginal product of labor to become negative, 2. Fill in the gaps in the table below, MARGINAL AVERAGE auANTlTYOF PRODUCT OF PRODUCT OF VARIABLE TOTAL VARIABLE VARIABLE INPUT OUTPUT INPUT INPUT 0 0 - - 1 150 '---" 2 200 3 - 200 4 760 5 150 --- 6 150 3. A political campaign manager must decide whether to emphasize tele\"ision advertisements or letters to potential voters, Describe the production function for \"otes, How might information about this function (such as the shape of the isoquants) help the campaign manager to plan strategy 4. A firm has a production process Ul which the UlpUts to production are perfectly substitutable in the long run, Can you tell whether the margulal rate of techni_ cal substi'tution is high or low, or is further informa_ tion necessarY Discuss, 5. The margulal product of labor is known to be greater than the average product of labor at a gi\'en level of employment Is the a\"erage product increasing or decreasing Explain, 6. The marginal product of labor in the production of computer chips is 50 chips per hour, The marginal rate of technical substitution of hours of labor for hours of machirle-capital is 114, What is the marginal product of capital 7. Do the following production functions exhibit decreasing, constant, or u1Creasing returns to scale a. Q = 5KL b. Q 2K + 3L 8. The production function for the personal computers of DISK, Inc, is gi\'en by Q = 10K sL s, where Q is the number of computers produced per day, K is hours of machine time, and L is hours of labor input. DISK's competitor, FLOPPY, Inc, is using the production fwlCtion Q = 10K "L ~, a. If both companies use the same amowlts of capital and labor, which will generate more output b. Assume that while capital is limited to 9 machine hours, labor is tmlimited in supply In which company is the marginal product of labor greater Explain, 9. In Example 6.3, wheat is produced according to the production function Q = 100(K S L 2 ), a. Beginning with a capital input of 4 and a labor input of 49, show that the marginal product of labor and the marginal product of capital are both decreasing, b. Does this production function exhibit increasing, decreasulg, or constant returns to scale In the last chapter, \ve examined the finn's production technology-the relationship that shows how factor inputs can be transformed into outputs, Now we will see hovv the production technology, together vvith the prices of factor inputs, determine the firm's cost of production, Given a firm's production technology, managers must decide how to produce. As "ve saw, inputs can be combined in different vvays to yield the same amOlmt of output For example, one can produce a certain output with a lot of labor and very little capital, with very little labor and a lot of capital, or with some other combination of the two, In this chapter ,,'I'e see how the optimal-Le., cost-rninimizing-combination of inputs is chosen. We will also see how a firm's costs depend on its rate of output and show how these costs are likely to change over time. We begin by explaining how cost is defined and measured, distinguishing between the concept of cost used by economists, who are concerned about the firm's future performance, and by accountants, \"ho focus on the firm's financial statements, We then examine how the characteristics of the firm's production teclmology affect costs, both in the short nm, when the firm can do little to change its capital stock, and in the long run, when the firm can change all its factor inputs. We then show how the concept of returns to scale can be generalized to allm\' for both changes in the mix of inputs and the production of many different outputs. We also show how cost sometimes falls over time as managers and workers learn from experience and make the production process more efficient Finally, we show hmv empirical information can be used to estimate cost hmctions and predict future costs. 7.1 Before we can analyze how a firm can minimize costs, we must clarify what we mean by cost in the first place and how we should measure it What items, for example, should be included as part of a firm's cost Cost obviously includes the wages a firm pays its workers and the rent it pays for office
204 Part 2 Producers, Consumers, and Competitive Markets .",,,n·,"" 7 The Cost of Production 205 space. But what if the finn already owns an office building and doesn't have to pay rent Hovv should ·we treat money that the firm spent tvvo or three years ago (and can't recover) for equipment or for research and development We'll answer questions such as these in the context of the economic decisions that managers make. onlY the monetary outlay for buying and then nnming the machinery, but also the'cost associated ·with wear and tear. ·When evaluating past performance, cost accountants use tax rules that apply to broadly defined types of assets to determine allowable depreciation in their cost and profit calculations. But these depreciation allowances need not ret1ect the actual wear and tear on the equipment, which is likely to vary asset by asset accounting cost Actual expenses plus depreciation charges for capital equipment economic cost Cost to a firm of utilizing economic resources in production, including opporhmity cost. opportunity cost Cost associated with opportunities that are forgone when a firm's resources are not put to their highest-value use. Economic Cost versus Economists often think of cost differently from financial accountants, vd10 are usually concerned with reporting the past performance of the firm for .exte~nal use, as in almual reports. Financial accountants tend to take a retrospectIVe VIew of the firm's finances and operations because they must keep track of assets and liabilities and evaluate past performance. As a result, accounting cost-the cost that financial accOlmtants measure-can include items that an economist would not include and would not include items that economists usually do include. For example, accounting cost includes actual expenses plus depreciation expenses for capital equipment, which are determined on the basis of the allowable tax h'eatment by the Internal Revenue Service. Economists-and we hope managers-take a forward-looking vie,,,' of the firm. They are concerned with the allocation of scarce resources. Tl~erefor.e, they care about what cost is likely to be in the future and about ways 111 whIch the firm miaht be able to rearra;1ge its resources to lower its costs and improve its profitability. As we will see, economists are therefore cO~1~erned with economi.c cost, which is the cost associated with forgone opportumties. The word economIc tells us to distinauish between costs that the firm can control and those it cannot. o Opportunity Cost Economists use the terms economic cost and opportullity cost synonymously. Opportunity cost is the cost associated with opportunities that are forgon~ by not putting the firm's resources to their highest-value use. Fo~ example, consld~r a firm that owns a building and therefore pays no rent for offIce space. Does this mean that the cost of office space is zero \Vhile a financial accountant would treat this cost as zero, an economist would note that the firm could have earned rent on the office space by leasing it to another company. This forgone rent is the opportunity cost of utilizing the office space and should be included as part of the economic cost of doing business. Accountants and economists both include actual monetary outlays, called cash flows, in their calculations. Cash flows include wages, salaries: and the .cost of materials and property rentals; they are important because they mvolve dIrect payments to other firms and individuals. These costs are relevant .for the economist because most monetary outlays, including wages and matenals costs, represent money that could have usefully been spent elsewhere. . . Let's take a look at how opportunity cost can make economic cost dIfter from accOlmting cost in the treatment of wages and economic depreciation. Consider an owner who manages her own retail store but chooses not to pay herse~f a salary, Although no monetary h'ansaction has occurred (and ~hus no accounting cost IS recorded), the business nonetheless incurs an opporhuuty cost because the ovvner could have earned a competitive salary by working elsewhere. Like·wise, accountants and economists often treat depreciation differently. When estimatina the future profitability of a business, an economist or manager is concerned wifh the capital cost of plant and machinery. This cost involves not sunk Although an opportunity cost is often hidden, it should be taken into account when making economic decisions. Just the opposite is true of a sunk cost: an expenditure that has been made and carmot be recovered. A SLmk cost is usually visible, but after it has been incurred, it should always .00 be iI;,nored when makina future economic decisions. Because a sunk cost cannot be recovered, it should not influence the firm's decisions. For example, consider the purchase of specialized equipment designed for a plant. Suppose the equipment can be used to do only what it was originally designed for and cannot be converted for alternative use. The expenditure on this equipment is a sunk cost. Because it has 110 alternative lise, its opportUllity cost is :::ero. Thus it should not be included as part of the firm's costs. The decision to buy this equipment may have been good or bad. It doesn't matter. It's water under the bridge and shouldn't affect current decisions. What if, instead, the equipment could be put to other use, or could be sold or rented to another firm In that case its use would involve an economic costnamely, the opportunity cost of using it rather than selling or renting it to another finn. Now consider a prospective sunk cost. Suppose, for example, that the firm has not yet bought the specialized equipment but is merely considering whether to do so. A prospective sunk cost is an illvestment. Here the finn must decide whether that in\'estment in specialized equipment is ecollomical-i.e., whether it will lead to a flow of revenues large enough to justify its cost. In Chapter 15, vve explain in detail how to make investment decisions of this kind. As an example, suppose a firm is considering moving its headquarters to a new city. Last year it paid $500,000 for an option to buy a building in the city. The option gives the firm the right to buy the building at a cost of $5,000,000, so that if it ultimately makes the purchase, its total expenditure will be $5,500,000. Now it finds that a comparable building has become available in the same city at a price of $5,250,000. Which building should it buy The answer is the original building. The $500,000 option is a cost that has been sunk and that should not affect the firm's current decision. What's at issue is spending an additional $5,000,000 or an additional $5,250,000. Because the economic analysis removes the sLmk cost of the option from the analysis, the economic cost of the original property is $5,000,000. The newer property, meanwhile, has an economic cost of $5,250,000. Of course, if the new building cost $4,750,000, the firm should buy it and forgo its option, The Northwestern University Law School has long been located in Chicago, along the shores of Lake Michigan. However, the main campus of the university is located in the suburb of Evanston. In the mid-1970s, the law school sunk cost Expenditure that has been made and cannot be recovered.
Page 1 and 2:
0-13-016583-2 TOO
Page 3 and 4:
Iii Iii iii Iii Iii Iii Iii Iii Iii
Page 5 and 6:
PART 1 Introduction: Marl
Page 7 and 8:
x Contents Contents xi 2 Producers
Page 9 and 10:
xiv Contents Contents 3 9.2 111e Ef
Page 11 and 12:
- Contents Contents 17 18 16.4 Effi
Page 13 and 14:
F xxii Contents Example 17.3 Reduci
Page 15 and 16:
--.. -~---.--.. '~~~~~~-~----------
Page 17 and 18:
PART 1 surveys the scope of microec
Page 19 and 20:
4 Part '1 Introduction: Markets and
Page 21 and 22:
8 Part 1 Introduction: Markets and
Page 23 and 24:
Page 25 and 26:
16 Part 'I Introduction: Markets an
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
Page 33 and 34:
32 Part 1 Introduction. Markets and
Page 35 and 36:
36 Part '1 Introduction Markets and
Page 37 and 38:
Page 39 and 40:
Page 41 and 42:
Page 43 and 44:
Page 45 and 46:
Page 47 and 48:
few years ago, General Mills decide
Page 49 and 50:
64 Part 2 Producers, Consumers, and
Page 51 and 52:
Page 53 and 54:
72 Part '2 Producers, Consumers, an
Page 55 and 56:
Page 57 and 58:
Page 59 and 60:
Page 61 and 62:
Page 63 and 64:
Page 65 and 66:
--------~ 96 Part 2 Producers, Cons
Page 67 and 68: 100 Part 2 Producers, Consumers, an
Page 85 and 86: 1136 Part 2 Producers, Consumers, a
Page 87 and 88: Part 2 Producers, Consumers, and Co
Page 89 and 90: 144 Part:2 Producers, Consumers, an
Page 91 and 92: - O far, we have assumed that price
Page 103 and 104: 1172 Part 2 Producers, Consumers, a
Page 111 and 112: 88 Part 2 Producers, Consumers, and
Page 117: 200 Part 2 Producers, Consumers, an
Page 121 and 122: 5 :; 208 Part 2 Producers, Consumer
Page 123 and 124: $ 212 Part 2 Producers, Consumers,
Page 169 and 170:
304 Part 2 Producers, Consumers, an
Page 171 and 172:
Page 173 and 174:
Page 175 and 176:
Page 177 and 178:
Page 179 and 180:
F PART 3 examines a broad range of
Page 181 and 182:
I I n a perfectly competitive marke
Page 183 and 184:
Price Dollars per 7 I Unit of Outpu
Page 185 and 186:
334 Part 3 Market Structure and Com
Page 187 and 188:
Page 189 and 190:
Page 191 and 192:
Page 193 and 194:
Page 195 and 196:
Page 197 and 198:
Page 199 and 200:
show all

Daniel l. Rubinfeld

Create successful ePaper yourself

Delete template?

Save as template?