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L14. Technology. Technology. Producers: have a technology A technology - a process converting inputs to an output Typical Inputs: labor, physical and human capital, land, R&D, marketing capital To make our life simpler: only two inputs capital ( ) and labor ( )

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## L14

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**L14**Technology**Technology**• Producers: have a technology • A technology - a process converting inputs to an output • Typical Inputs:labor, physical and human capital, land, R&D, marketing capital • To make our life simpler: only two inputs capital ( ) and labor ( ) • Technology given by production function**Production function: Geometry**z y 5 L 3 K**Production function: Geometry**f(K,L) y 5 L 3 K**3 Classic Examples**Cobb-Douglass Fixed Proportions Perfect Substitutes**3 Classic Examples**Cobb-Douglass Fixed Proportions Perfect Substitutes**Marginal Product**• MPK andMPL • Economic Interpretation of MPK – how much product goes up if K increases by 1 • MPL analogous but for L • Geometric Interpretation**MPK Increasing, Constant, Decreasing?**Cobb-Douglass More generally**MPK Increasing, Constant, Decreasing?**Fixed Proportions Perfect Substitutes**Technical Rate of Substitution**• TRS: slope of isoquant • Interpretation: • Formula:**What’s new?**• Long run and Short run ( fixed) • Monotone transformation? Nooooo! • Constant Returns to Scale (CRS) • Increasing (IRS), Decreasing (DRS)**CRS: Geometry**z 2z L K

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