- StudyBlue
- Wisconsin
- University of Wisconsin - Madison
- Agricultural And Applied Economics
- Agricultural And Applied Economics 215
- Jones
- Chapter 7

Ali L.

Isoquant

Equal quantity, on an isoquant graph (capital vs. labor) anywhere on the line you will get the same output

Marginal Rate of Technical Substitution

Slope of an isoquant (decreases at a decreasing rate), change in capital/change in labor--always negative; loss in output from decreasing labor must be equal to gain in output from adding capital

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Isocost Line

(Price of labor x quantity) + (price of capital x quantity)=cost

Slope of an isocost line

Negative of (wage rate/rental rate)

Effect of change in budget

Iso-cost line shifts out/in

Effect of change in wage rate

Line pivots

Effect of change in rental rate

Line pivots

Least Cost Decision Rule

Slope of isoquant=slope of isocost line; MMP per dollar spent on labor=MPP per dollar spent on capital

Long Run Average Cost

All costs become variable, points of tangency with a series of short run average total cost curves

Short Run Average Costs

Fixed and variable costs

Long Run Equilibrium

Short run average total cost=long run average cost=long run price

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Production Possibilities Frontier

Shows substitutions between two products given most efficient use of firm's resources

Marginal Rate of Product Transformation

Change in product A/change in product B

Iso-Revenue Line

Given prices for products A & B, different combinations of products that give same revenue

Effect of change in income or both prices on iso-revenue graph

Shifts out/in

Effect of change in price of one product on iso-revenue graph

Pivots

Where is profit maximized (with a combination of two products)?

Where the slope of a PPF curve (change in product A/change in product B) = slope of iso-revenue line (-price of product B/price of product A)

i.e. iso-revenue line is tangent to production possibilities frontier

i.e. iso-revenue line is tangent to production possibilities frontier

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