Firms and production - Long run production and isoquants
5 important questions on Firms and production - Long run production and isoquants
What does the long-run production in economics assume about inputs, and how does this impact firm decisions?
- Long-run (LR) production assumes all inputs are variable.
- This allows firms the freedom to decide production methods (labor or capital focused).
- Enables flexibility in adjusting production based on constraints and preferences.
What is the economic theory behind isoquants in production?
- Isoquants are analogous to indifference curves but for firms.
- They show efficient combinations of inputs (labor, capital) to produce a specific output level.
- Illustrate a firm's flexibility with input combinations.
- Isoquants are cardinal, whereas indifference curves are ordinal.
- The shape of isoquants indicates how easily inputs can be switched (flat = easy, bowed = hard).
How is the Cobb-Douglas production function related to long-run production, and what role does "A" play?
- In LR production, the Cobb-Douglas function is used (e.g., \(q = AL^aK^b\)).
- "A" is a factor of production, affecting output.
- Rescaling output unit adjusts the function to focus on input elasticity.
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What does a standard isoquant represent in economic theory?
- A standard isoquant represents combinations of inputs that yield the same level of output.
- It illustrates the concept of imperfect substitutability between inputs.
- The curve is typically downward sloping and convex to the origin, showing diminishing marginal rates of technical substitution.
How does redefining the unit of output in a long-run production function affect the equation?
- If output unit is redefined to 1/A, the function changes.
- This emphasizes input contribution, showing equal elasticity \(L^{0.5}K^{0.5}\).
- Reflects balanced reliance on labor and capital.
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