Advanced Microeconomics at Universität Zu Kiel | Flashcards & Summaries

Lernmaterialien für Advanced Microeconomics an der Universität zu Kiel

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How is the economic profit defined?

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Revenue of a firm minus its costs

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What is the production function?

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f(x) = {y e R: y is the max. ouput associated with (y,-x) e Y}

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What does convex technology mean?

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Convexity means: If x

and x‘‚ are in V(y), then

tx + (1-t)x' is in V(y)

for all 0≤ t ≤ 1.


V(y) is a convex set.

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When do we have constant returns to scale?

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We have constant returns to scale if any of the following are satisfied:

1. y e Y implies ty e Y, for all t ≥ 0

2. x e V(y) implies tx e V(y) for all t ≥ 0

3. f(tx)=tf(x) for all t ≥ 0; i.e. the production function is homogeneous of degree 1.

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When do we have increasing returns to scale?

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We have increasing returns to scale if f(tx) > tf(x) for all t > 1

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When do we have decreasing returns to scale?

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We have decreasing returns to scale if f(tx) < tf(x) for all t > 1

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What behavioral assumption is used for analyzing firms?

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We use the assumption of profit maximization.


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What is the technical rate of substitution?

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In the two output case it is equivalent to the slope of the isoquant:

how one has to adjust x2 to keep output constant when x1 changes by a small amount.

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What does the factor demand function present?

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The factor demand function gives us the optimal choice of inputs as a function of the prices. It is denoted by x(p,w)

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What is the supply function of the firm?

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y(p,w) = f(x(p,w)

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What do we assume about the factor demand and supply function?

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We assume they are well defined and nicely behaved.

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What is the implicit assumption when we have monotonicity of a production function?

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We implicilty assume free disposal of inputs is possible.

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Q:

How is the economic profit defined?

A:

Revenue of a firm minus its costs

Q:

What is the production function?

A:

f(x) = {y e R: y is the max. ouput associated with (y,-x) e Y}

Q:

What does convex technology mean?

A:

Convexity means: If x

and x‘‚ are in V(y), then

tx + (1-t)x' is in V(y)

for all 0≤ t ≤ 1.


V(y) is a convex set.

Q:

When do we have constant returns to scale?

A:

We have constant returns to scale if any of the following are satisfied:

1. y e Y implies ty e Y, for all t ≥ 0

2. x e V(y) implies tx e V(y) for all t ≥ 0

3. f(tx)=tf(x) for all t ≥ 0; i.e. the production function is homogeneous of degree 1.

Q:

When do we have increasing returns to scale?

A:

We have increasing returns to scale if f(tx) > tf(x) for all t > 1

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Q:

When do we have decreasing returns to scale?

A:

We have decreasing returns to scale if f(tx) < tf(x) for all t > 1

Q:

What behavioral assumption is used for analyzing firms?

A:

We use the assumption of profit maximization.


Q:

What is the technical rate of substitution?

A:

In the two output case it is equivalent to the slope of the isoquant:

how one has to adjust x2 to keep output constant when x1 changes by a small amount.

Q:

What does the factor demand function present?

A:

The factor demand function gives us the optimal choice of inputs as a function of the prices. It is denoted by x(p,w)

Q:

What is the supply function of the firm?

A:

y(p,w) = f(x(p,w)

Q:

What do we assume about the factor demand and supply function?

A:

We assume they are well defined and nicely behaved.

Q:

What is the implicit assumption when we have monotonicity of a production function?

A:

We implicilty assume free disposal of inputs is possible.

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