Ch18 Technology

Chapter Eighteen
Technology
Technologies
A
technology is a process by which

inputs are converted to an output.
E.g. labour, a computer, a projector,
electricity, and software are being
combined to produce this lecture.
Technologies
Usually
several technologies will

produce the same product -- a
blackboard and chalk can be used
instead of a computer and a
projector.
Which technology is best?
How do we compare technologies?
Input Bundles
xi
denotes the amount used of input i;

i.e. the level of input i.
An input bundle is a vector of the
input levels; (x1, x2, , xn).
E.g.
(x1, x2, x3) = (6, 0, 93).
yf(x
x
)
1,
n
Production Functions
y
denotes the output level.

The technologys production
function states the maximum amount
of output possible from an input
bundle.
Production Functions
One input, one output
Output Level
y = f(x) is the
production
function.
y = f(x) is the maximal

output level obtainable
from x input units.
x
Input Level
y
f(x
x
)
1,
n
Technology Sets
A
production plan is an input bundle

and an output level; (x1, , xn, y).
production plan is feasible if
The
collection of all feasible production

plans is the technology set.
Technology Sets
Output Level
y
y = f(x) is the
production
function.
y = f(x) is the maximal
output level obtainable
from x input units.
y = f(x) is an output level
that is feasible from x
input units.
x
x
Input Level
{(x
,
x
,y
)|1
f
(0x
,
x
)
a
n
d
11
n
n
0}.
Technology Sets
The technology set is
Technology Sets
Output Level
y
The technology
set
y
x
Input Level
Technology Sets
Output Level
Technically
efficient plans
The technology
Technically set
inefficient
plans
x
Input Level
1
/
3
y
f(x
2x2.
1,2)
Technologies with Multiple Inputs

What
does a technology look like

when there is more than one input?
The two input case: Input levels are
x1 and x2. Output level is y.
Suppose
the production function is
/y
1
3
1
/
3
1
/
3
2x
1
2
4
.
2
1/328
1/31/38
E.g.
the maximal output level possible

from the input bundle
(x1, x2) = (1, 8) is
And
the maximal output level possible

from (x1,x2) = (8,8) is
Isoquants with Two Variable Inputs

x2
y
x1

Isoquants
can be graphed by adding

an output level axis and displaying
each isoquant at the height of the
isoquants output level.

x2
y
y
y
x1

The
complete collection of isoquants

is the isoquant map.
The isoquant map is equivalent to
the production function -- each is the
other.
a
a
1
2
n
y
A
x
x
.
1
/
3
y
x
2
1
1
n
2,,.
A
a
a
n
d
2
33
Cobb-Douglas Technologies
A
Cobb-Douglas production function

is of the form
E.g.
with
a
12
y
Cobb-Douglas Technologies
x2
All isoquants are hyperbolic,

asymptoting to, but never
touching any axis.
x1
in
m
{y
n
,2
,
a
x
a
x
}
.
1
2
n
i,a
m
{1x
n
2n
}d
1a
2.
2
Fixed-Proportions Technologies
A
fixed-proportions production
function is of the form
E.g.
with
y
m
in
{x
1,2}
Fixed-Proportions Technologies
x2
x1 = 2x2
7
4
2
4
min{x1,2x2} = 14
min{x1,2x2} = 8
min{x1,2x2} = 4
14
x1
a
x
a
x
a
x
.
1
2
n
y
3
x
1
2
n
2,a1a
n
d
3.
2
Perfect-Substitutes Technologies
A
perfect-substitutes production
function is of the form
E.g.
with
x
3x
1
2
Perfect-Substitution Technologies
x2
x1 + 3x2 = 18
x1 + 3x2 = 36
x1 + 3x2 = 48
8
6
3
All are linear and parallel

9
18
24 x1
yfM
(x
,
)i
x
1P
n
xyi
Marginal (Physical) Products

The
marginal product of input i is the

rate-of-change of the output level as
the level of input i changes, holding
all other input levels fixed.
That is,
1/32
y
f(x
,12)x

E.g. if
then the marginal product of input 1 is
/1322
1
fM
y
(P
,11y
x
)123
x

E.g. if
/1322
1
fM
y
(P
,11y
x
)123
x

E.g. if
and the marginal product of input 2 is
/12
1
3
2
fM
y
(P
,21x
x
)1y
x
23
1
2
2x
/31/3.

E.g. if
and the marginal product of input 2 is
2
M
P
xixi yi
xyi0.

The
marginal product of input i is

diminishing if it becomes smaller as
the level of input i increases. That is,
if
1
/
3
2
y
x
1
2
2
1
/
3
1
/
3
M
P
x
M
P
2
2
1
3
M
P
2
5
/
3
1
x
x
0
1
x
9
224.
E.g. if
then
and
so
and
Both marginal products are diminishing.
Technical Rate-of-Substitution
At
what rate can a firm substitute

one input for another without
changing its output level?
'2x
x
'1
x2
y
x1
'2x
x
'1
x2
The slope is the rate at which

input 2 must be given up as
input 1s level is increased so as
not to change the output level.
The slope of an isoquant is its
technical rate-of-substitution.
y
x1
How
is a technical rate-of-substitution
computed?
f
(
x
,
)
.
1
2
y
d
y
d
x
d
x
1
2.
How
is a technical rate-of-substitution
computed?
The production function is
A small change (dx1, dx2) in the input
bundle causes a change to the output
level of
y
d
y
d
x
d
x
.
1
2
y
0d
x
d
x
1
2.
But dy = 0 since there is to be no change

to the output level, so the changes dx 1
and dx2 to the input levels must satisfy
y
0
d
x
d
x
1
2
2
1
x
x
d
/12.
y
rearranges to
so
d
x
/1
y
x
2
12
is the rate at which input 2 must be given

up as input 1 increases so as to keep
the output level constant. It is the slope
of the isoquant.
a
b
fd
(x
,12x
y
x
)
x
1
2
1
2
y
a
b
1
a
b
x
.
1
2
1
a
1
b
/
y
x
x
a
1
2
2
2
.
x
bb
1
Technical Rate-of-Substitution; A
Cobb-Douglas Example
so
and
The technical rate-of-substitution is
1
2
/y
1
3
2
x
;
a
a
n
d
b
3
3
a
x
(
/
)
x
x
2
2
T
R
S
b
1211
x2
x1
1
2
/y
1
3
2
x
;
a
a
n
d
b
3
3
a
x
(
/
)
x
x
2
2
T
R
S
b
122
1
1
8
x2
x1
1
2
/y
1
3
2
x
;
a
a
n
d
b
3
3
a
x
(
/
)
x
x
2
2
T
R
S
b
122
1
1
6
24
x2
12
x1
Well-Behaved Technologies
A
well-behaved technology is
monotonic, and
convex.
Well-Behaved Technologies Monotonicity

Monotonicity:
More of any input

generates more output.
monotonic
y
not
monotonic
x
Well-Behaved Technologies Convexity

Convexity:
If the input bundles x

and x both provide y units of output
then the mixture tx + (1-t)x
provides at least y units of output,
for any 0 < t < 1.
'"
x
2
2x
'1x
"
1
x2
y
x1
'"
x
2
'"
'
"
t
x
(
1
t
)
x
,
(
1
t
)
x
1
1
2
2
2x
'1"
1
x2
y
x1
'"
x
2
'"
'
"
t
x
(
1
t
)
x
,
(
1
t
)
x
1
1
2
2
2x
'1"
1
x2
y
y
x1
'"
x
2
2x
'1x
"
1
x2
Convexity implies that the TRS

increases (becomes less
negative) as x1 increases.
x1
Well-Behaved Technologies
higher output
x2
y
y y
x1
The Long-Run and the Short-Runs

The
long-run is the circumstance in

which a firm is unrestricted in its
choice of all input levels.
There are many possible short-runs.
A short-run is a circumstance in
which a firm is restricted in some way
in its choice of at least one input
level.

What
do short-run restrictions imply

for a firms technology?
Suppose the short-run restriction is
fixing the level of input 2.
Input 2 is thus a fixed input in the
short-run. Input 1 remains variable.
/y
1
3
x2yx11/3101/3x12/3.51/3

is the long-run production
function (both x1 and x2 are variable).
The short-run production function when

x2 1 is
The short-run production function when
x2 10 is
/
/x
1
3
1
3
yy
x
0
5
1/31
2
x1
Four short-run production functions.
Returns-to-Scale
Marginal
products describe the

change in output level as a single
input level changes.
Returns-to-scale describes how the
output level changes as all input
levels change in direct proportion
(e.g. all input levels doubled, or
halved).
f(k
x
,k
x
)
k
f(x
,x
)
1,2
n
1,2
n
Returns-to-Scale
If, for any input bundle (x1,,xn),
then the technology described by the

production function f exhibits constant
returns-to-scale.
E.g. (k = 2) doubling all input levels
doubles the output level.
f(k
x
,k
x
)
k
f(x
,x
)
1,2
n
1,2
n
Returns-to-Scale
then the technology exhibits diminishing

returns-to-scale.
E.g. (k = 2) doubling all input levels less
than doubles the output level.
f(k
x
,k
x
)
k
f(x
,x
)
1,2
n
1,2
n
Returns-to-Scale
then the technology exhibits increasing

returns-to-scale.
E.g. (k = 2) doubling all input levels
more than doubles the output level.
a
x
a
x
a
x
.
1
2
n
a
x
)
a
(k
x
)
a
(k
x
)
1(k
1
2
2
n
n
Examples of Returns-to-Scale
The perfect-substitutes production
function is
Expand all input levels proportionately

by k. The output level becomes
a
x
a
x
a
x
.
1
2
n
(
a
k
x
)
a
(k
x
)
(x
a
))
k
x
1
1
2
2
n
n
function is

a
x
a
x
a
x
.
1
2
n
(
a
)y
k
x
a
(
k
x
)
a
(
k
x
)
1
1
2
2
n
n
x
)
.
function is


function exhibits constant returns-to-scale.
im
y
m
n
{
a
x
,,
a
x
,
a
x
}
.
1
2
n
in
{a
x
),a
(k
x
),
a
(k
x
)}
1(k
1
2
2
n
n
The perfect-complements production
function is

i
y
m
n
{
a
x
,,
a
x
,
a
x
}
.
1
2
n
m
ik
{(a
n
(k
x
),,,a
(k
x
),
(x
a
)})}
k
x
1
1
2
2
n
n
function is

i
y
m
n
{
a
x
,,
a
x
,
a
x
}
.
1
2
n
m
ik
{y
((.k
n
a
x
),,,a
(k
x
),
(x
a
)})}
k
x
1
1
2
2
n
n
function is


function exhibits constant returns-to-scale.
a
a
1
2
n
y
x
.
a
a
a
1
2
(k
x
)(k
x
)(k
x
)n
The Cobb-Douglas production function is

a
a
1
2
n
y
x
.
a
a
a
1
2
(
k
x
)12
(k
x
)n1
(a
k
)2n
x

a
a
1
2
n
y
x
.
a
a
1
2
n
(
k
x
)1a
(2
)
k
x
(
k
x
)
a
n
1
2
12n

a
a
1
2
n
y
x
.
a
a
a
1
2
n
(
)k
k
(a
x
k
x
)
(
k
x
)
a
1
2
n
1
2
n
1
2
1a
n
y
.

a
a
1
2
n
y
x
.
a
n
(k
x
)a1(k
)221
(k
)n
k
y
.
The Cobb-Douglas technologys returnsto-scale is

constant
if a1+ + an = 1
a
a
1
2
n
y
x
.
a
n
(k
x
)a1(k
)221
(k
)n
k
y
.

constant
if a1+ + an = 1
increasing if a1+ + an > 1
a
a
1
2
n
y
x
.
a
n
(k
x
)a1(k
)221
(k
)n
k
y
.

constant
if a1+ + an = 1
increasing if a1+ + an > 1
decreasing if a1+ + an < 1.
Returns-to-Scale
Q:
Can a technology exhibit

increasing returns-to-scale even
though all of its marginal products
are diminishing?
/y
2
3
x
1.
Returns-to-Scale
Q:
Can a technology exhibit

increasing returns-to-scale even if all
of its marginal products are
diminishing?
A: Yes.
E.g.
a
2
/
3
1
2
y
x
1
4
a
1
23
Returns-to-Scale
so this technology exhibits

increasing returns-to-scale.
a
2
/
3
1
2
y
x
1
4
a
1
2
3
2
1
/
3
2
M
P
xx
1
Returns-to-Scale

But
increases
diminishes as x1
a
2
/
3
1
2
y
x
1
4
a
1
2
3
2
1
/
3
2
M
P
x
x
1
2
23
1
Returns-to-Scale

But
diminishes as x1
increases and
diminishes as x1
increases.
Returns-to-Scale
So
a technology can exhibit

increasing returns-to-scale even if all
of its marginal products are
diminishing. Why?
Returns-to-Scale
A
marginal product is the rate-ofchange of output as one input level

increases, holding all other input
levels fixed.
Marginal product diminishes because
the other input levels are fixed, so the
increasing inputs units have each less
and less of other inputs with which to
work.
Returns-to-Scale
When
all input levels are increased

proportionately, there need be no
diminution of marginal products
since each input will always have the
same amount of other inputs with
which to work. Input productivities
need not fall and so returns-to-scale
can be constant or increasing.

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Ch18 Technology

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Chapter Eighteen

technology is a process by which

several technologies will

denotes the amount used of input i;

(x1, x2, x3) = (6, 0, 93).

denotes the output level.

y = f(x) is the maximal

production plan is an input bundle

production plan is feasible if

collection of all feasible production

The technology set is

Technologies with Multiple Inputs

does a technology look like

the production function is

the maximal output level possible

the maximal output level possible

Isoquants with Two Variable Inputs

Isoquants with Two Variable Inputs

can be graphed by adding

Isoquants with Two Variable Inputs

Technologies with Multiple Inputs

complete collection of isoquants

Cobb-Douglas production function

All isoquants are hyperbolic,

All are linear and parallel

Marginal (Physical) Products

marginal product of input i is the

Marginal (Physical) Products

then the marginal product of input 1 is

Marginal (Physical) Products

then the marginal product of input 1 is

Marginal (Physical) Products

then the marginal product of input 1 is

and the marginal product of input 2 is

Marginal (Physical) Products

then the marginal product of input 1 is

and the marginal product of input 2 is

Marginal (Physical) Products

marginal product of input i is

Both marginal products are diminishing.

what rate can a firm substitute

The slope is the rate at which

But dy = 0 since there is to be no change

is the rate at which input 2 must be given

The technical rate-of-substitution is

Well-Behaved Technologies Monotonicity

More of any input

Well-Behaved Technologies Convexity

If the input bundles x

Convexity implies that the TRS

The Long-Run and the Short-Runs

long-run is the circumstance in

The Long-Run and the Short-Runs

do short-run restrictions imply

The Long-Run and the Short-Runs

The short-run production function when

The Long-Run and the Short-Runs

Four short-run production functions.

products describe the

If, for any input bundle (x1,,xn),

then the technology described by the

If, for any input bundle (x1,,xn),

then the technology exhibits diminishing

If, for any input bundle (x1,,xn),