ECON 410 Firm Theory

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Last updated 7:23 PM on 9/30/26
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7 Terms

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Production Function

  • summarizes the various ways that a firm can transform inputs into the maximum amount of output

  • shows maximum amount of output that can be produced from given levels of labor and capital

  • Q = f(L,K)

  • cardinal


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Common Production Functions

  • Cobb-Douglas: Q = cL^aK^b

  • Perfect Substitutes: Q = aL + bK

  • Fixed Proportion: Q = min (aL,bK)

  • Quasi-linear: Q = aL + bf(K) OR Q = af(L) + bK


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isoquant

graphically summarizes the efficient combinations of inputs (labor and capital) that will produce a specific level of output

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properties of isoquants

  • the farther an isoquant is from the origin, the greater the level of output

  • isoquants do not cross

  • isoquants slope downward


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what does the slope of the isoquant show

the ability of a firm to replace input with another

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Marginal Rate of Technical Substitution (MRTS)

  • the absolute value of the slope of an isoquant at a single point

  • tells us how many units of K the firm can replace with a single unit of L, without changing q


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MRTS formula

ΔK/ΔL = dK/dL = MPL/MPK