Long-Run

Model
21 9
a
-

Multiple -

Input q f(1,k)
=

y f(x,,x)
=
cost
of us, per unit w,
=

cost
of me per unit:
We

TC(y) wis, =

well
concept of Isoquant

PMG
Let
y 1, N2
=

He
y x,
=
x,

y ax,+bun
=

2,.4, 20y=min(an,,buz)
=

2,.12 100 =

z,
 - Consumer's
Theory theory Producer '

Indiff Lure
Isoquant
I
-

Diff Combination
of 2 Commoditive
Diff Combination
of 2
Input
He ardy), that
provides (4, and
m), that provides
same level
of utility produce same outputlevel

PMG
Let
a(x,y) x y=

y(x,,42) an,
Let =

N2

IC 10

e d

MRS=1
Slopey stops y
or
IC:
In
10 MRTS
=
TRS
=

MVy
 TC 10w
=
w, 10
=

We= 20

eg!
Let
y x,
=
n, TC W,
=
l, -
W2 Yz

Max.
of y subject given
to TC

L e,x
= -

x[w,x,+wal-T2]

I
Lan Yw,-

P M G-
2x, a,
= -x [W,]= 0 =

Divided
by

5
: Bu,u,"
-

x[we]= 0 Bu,u* 1w
=

e
t. I,
=

-(w,x, w2xi-TC] -
8
0 T
w,n, +w2x
+ =
=
=

wic +

(j.4,4] +C
=
t u x,
=
n,Yu, +42= m
win.
(* ]: TC

win,
(*) =
+C

n=
i, n=
s.!
new a* B

PMG
=

Another
method
- TC 10w w, 10 We 20

n,"
=
= =

Let TC W, l,
3- -
W2 Yz
=

Tangency
-
ble Quant and
line
y x, x, TC w, n, bwcde
=
=

Iso Quant 10-cost live

Stops of Slope of
-

or= TRS
 =
a, r,
:
Mp,:

e
MP:
It:
Be,

Grace
Wi

in

E. :Ir

PMG
Cand"
Targency -
-
 Return to Scale

CRS

IRS

DRS 2+ B > 1 IRS

=>

1 CKS
=>

x4.x,
=

g y Cobbugte

PMG
=

-1 DKS
->

y' Ial)" (tue)"

=

=to n, tPx,
y'=t4+B a, ne
Depends on 2+ B

By
x+
=+ Nature Return ?
y of
IRS CRS DKS
"I
bun Yes I
=

you*=A
=

and
Input me us are

P M G
perfectsubst

O error
scope of Isoquant and is costlive TC W,4,
= + Weve

If -Rs
= 7
Firm will

uc 0
his

=
only be

n,* =
C from will liv
only P2
m=
me* I
=
 S012 on 180 costline
-
Infinite

y
ax
= +
by

y a(tn)
= +
b(ty)
=

[by)

PMG
-

y' ty
=

CRS &

-
B
⑧
y x,*un I
=

W, = I We 2 =

Ca optimal condition

i.e blw Iso lost

tangency Isoquant and line

i.e
Slope of Isoquant:Slope of Iso cost line

PMG
x,* m,*

in
La, GrlI y =

=WI
Mr. du

(uz)*
Tz

y
=
me
H
=

y
gtx,* n
=

Mie-= In,
at y a*
=

= I
- 24 =N,

winere
 x,* xyz
=

③ Try) w,x+win=

=(1) xyz (2)

I
+

I
12y2 y2

PMG
= +

(y) 2E2
=

y2
-
MC(y)
=252.(23)
=

③ P MC Y
y
=
=

P Y5
y
=

y: its or
y(P): itu
4.y=I W
=
10
WK 100 =

k
# 1 =

Lk 10
=

LI 30
=

PMG
Lk 20
=

2 Lk
# =

To Lk = 10

L
Lk 20
=

y 1
=

3
=>
I
=

1k 30 =
y1 17K)
=

I RS:
e
=
y
-

y =+2y
 (b) conditional
Inputad
y 1
=

option land y k2
=

k* =
-is

PMG
* 10k*
=

k
L* 10 y
F:
=

% #10

I
④
I to
=

k(1) 1
=

-
2
C WcL
=
+
WpK
(C) C(y) = wL+wK* =(0)((0) (100)(1) -

=(0(10) (0(vy) =Iw+1w

=
+

L (2) 10
=

C(y) 1005 20 (102) 100/2

lor
c 10= +

k(2) 5
=
+

2N52
=

=
(e) Ac(y) "8)
=

y
M((y) =

-(xy)]
:
Iw
w.
Ig
=

8) y
iti
=

PMG
=

L
AG

y y
A Run
long supply cure P MC
-
=

-
-

P= Iw
-

Supply
10000
X 1 x =

P Lance
05. x, x2 W, 2 We= I
y
=
+
=

- -

(a)
Slope of Isoquant, MRTS or TRS=
I out: 1 constant

compare with

PMG
2

T
S
-
x,* 0
=

xc*=?

m =0 Me* y
*

C(y) w, x,
=
+
wide

2(0)
= + ()(y)
C(y) y
=

MC(y1 1
=
 (b) P MC P
perfectlyEaste
=

P 1
=

supplyLure
I

Dife,
PMG
0 (C) see W, 2 =

We 2
=

C(y)
TRS I =

I
= supply Lume

Any combinations
of and in will cock

⑧
,

All value
of , and us that
satisfies y=u,*+4*

C(y) w,aY win*

=
+

I
P MC P Perg. Flastic
=In+ 2u*
=

sply
↑

2
=

(n,- 4 came at

c(y) 2y
=

y
 Exercises 161

The average cost and marginal cost functions are

2y 1/2
AC(y) = C(y)/y = = 2y −1/2 ,
y

dC(y) d(2y 1/2 )

MC(y) = = = y −1/2 .
dy dy

Exercises
1. Explain why the concepts of constant, increasing, and decreasing returns to scale
make sense when applied to isoquants, but would not make sense in the theory of
the consumer, if applied to indifference curves. That is, why does the spacing between
successive isoquants make sense, whereas the spacing of successive indifference curves
does not?
2. If the price of the output of a profit-maximizing firm rises, how will the firm’s output

PMG
change?
1/4 1/4
3. Suppose a firm’s production function is y = x1 x2 . The prices of the inputs are
- w = 1 and w = 2.
1 2 √ 2
(a) Show that the long-run conditional factor demands are x1
∗
(y) = 2y and x2∗ (y) =
v 2 √
y / 2. √
e (b) Show that the long-run cost function is C(y) = 2 2y 2 . √
(c) Show that the long-run supply curve for the firm is given by y ∗ (p) = p/(4 2).
W

X
4. A firm produces computers with two factors of production: labor L and capital K.
Its production function is y = LK/10. Suppose the factor prices are wL = 10 and
wK = 100.
v(a) Graph the isoquants for y equal to 1, 2, and 3. Does this technology show increasing,
~ constant, or decreasing returns to scale? Why?

-(b) Derive the conditional factor demands.

(c) Derive the long-run cost function C(y).
*
(d) If the firm wants to produce one computer, how many units of labor and how many
units of capital should it use? How much will it cost? What if the firm wants to
produce two computers?
(e) Derive the firm’s long-run average cost function AC(y) and long-run marginal cost
-
-
function MC(y). Graph AC(y) - and MC(y). What is the - firm’s long-run supply
curve?

a5. Let the firm’s production function be given by y = x1 + x2 . Suppose w1 = 2 and

w2 = 1.
(a) Derive the conditional factor demands and use them to find the long-run cost
X function for this firm.
(b) For these factor prices, derive and graph the firm’s long-run supply curve.
to
(c) Suppose the price of the second input, w2 , rises to $2 per unit. What is the long-run

auf cost curve? Derive and graph the new supply curve.
Hint: Because these isoquants are straight lines, cost minimization cannot require
tangencies of isoquants and isocost lines.
 162 Chapter 9. Theory of the Firm 2: The Long-Run, Multiple-Input Model
1/5 1/5 1/5
6. Consider a production function that uses three inputs: y = x1 x2 x3 . Suppose the
factor prices are w1 = w2 = w3 = 1.
(a) What are the conditional factor demands x1∗ (y), x2∗ (y), and x3∗ (y)?
(b) Find the long-run cost function C(y).
(c) Find the long-run supply curve y ∗ (p).

Max
of y x," "us," x, ++ds
=
st. c:

L x,"uses-x[x,+4,+,-]
=

-....
EatIanns a"
i
-x 0
a

-...oh
= ->

=
=

PMG
:I, e-, =0
ft
I
-

12 N1
=

= are! -
x =
0
I
=

an x
=
-- 0 ee

= So, d, U2 dy
= =

Isit
1, we we
y
=

I
y = Wi

y5 Factor Award
es* us Condition
*

=
x,*
=
=

-
-

Ec(y) w,n,+ wal*-wyrs*

=

c(y) 3y5/s
=

Mc
= y-
=

( P MC
M((y)5y43
=

P =

5y43 =

I y43 =

431264/
3 ()"
=

sublime. fig