production. costs problem 6 on p.194.
DESCRIPTION
Production. Costs Problem 6 on p.194. . Production. Costs Problem 6 on p.194. . Production. Costs Problem 6 on p.194. . Production. Costs Problem 6 on p.194. . Production. Costs Problem 6 on p.194. . Production. Costs Problem 6 on p.194. . Production. Costs Problem 6 on p.194. . - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/1.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 ---
100 200
200 125
300 133.3
400 150
500 200
600 250
![Page 2: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/2.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 ---
100 10,000 200
200 10,000 125
300 10,000 133.3
400 10,000 150
500 10,000 200
600 10,000 250
![Page 3: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/3.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 ---
100 10,000 20,000 200
200 10,000 125
300 10,000 133.3
400 10,000 150
500 10,000 200
600 10,000 250
![Page 4: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/4.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 ---
100 10,000 20,000 200
200 10,000 25,000 125
300 10,000 40,000 133.3
400 10,000 60,000 150
500 10,000 100,000 200
600 10,000 150,000 250
![Page 5: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/5.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 ---
100 10,000 10,000 20,000 200
200 10,000 15,000 25,000 125
300 10,000 30,000 40,000 133.3
400 10,000 50,000 60,000 150
500 10,000 90,000 100,000 200
600 10,000 140,000 150,000 250
![Page 6: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/6.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 ---
100 10,000 10,000 20,000 200
200 10,000 15,000 25,000 125
300 10,000 30,000 40,000 133.3
400 10,000 50,000 60,000 150
500 10,000 90,000 100,000 200
600 10,000 140,000 150,000 250
![Page 7: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/7.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 ---
100 10,000 10,000 20,000 200
200 10,000 15,000 25,000 125
300 10,000 30,000 40,000 133.3
400 10,000 50,000 60,000 150
500 10,000 90,000 100,000 200
600 10,000 140,000 150,000 250
![Page 8: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/8.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- ---
100 10,000 10,000 20,000 100 200
200 10,000 15,000 25,000 50 125
300 10,000 30,000 40,000 33.3 133.3
400 10,000 50,000 60,000 25 150
500 10,000 90,000 100,000 20 200
600 10,000 140,000 150,000 16.7 250
![Page 9: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/9.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- ---
100 10,000 10,000 20,000 100 100 200
200 10,000 15,000 25,000 50 75 125
300 10,000 30,000 40,000 33.3 100 133.3
400 10,000 50,000 60,000 25 125 150
500 10,000 90,000 100,000 20 180 200
600 10,000 140,000 150,000 16.7 233.3 250
![Page 10: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/10.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- ---
100 10,000 10,000 20,000 100 100 200
200 10,000 15,000 25,000 50 75 125
300 10,000 30,000 40,000 33.3 100 133.3
400 10,000 50,000 60,000 25 125 150
500 10,000 90,000 100,000 20 180 200
600 10,000 140,000 150,000 16.7 233.3 250
MC = cost of making an extra unit
![Page 11: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/11.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- ---
100 10,000 10,000 20,000 100 100 200
200 10,000 15,000 25,000 50 75 125
300 10,000 30,000 40,000 33.3 100 133.3
400 10,000 50,000 60,000 25 125 150
500 10,000 90,000 100,000 20 180 200
600 10,000 140,000 150,000 16.7 233.3 250
Q
TCMC
![Page 12: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/12.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- ---
100 10,000 10,000 20,000 100 100 200
200 10,000 15,000 25,000 50 75 125
300 10,000 30,000 40,000 33.3 100 133.3
400 10,000 50,000 60,000 25 125 150
500 10,000 90,000 100,000 20 180 200
600 10,000 140,000 150,000 16.7 233.3 250
Q
VC
Q
TCMC
![Page 13: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/13.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- ---
100 10,000 10,000 20,000 100 100 200 100
200 10,000 15,000 25,000 50 75 125
300 10,000 30,000 40,000 33.3 100 133.3
400 10,000 50,000 60,000 25 125 150
500 10,000 90,000 100,000 20 180 200
600 10,000 140,000 150,000 16.7 233.3 250
Q
VC
Q
TCMC
![Page 14: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/14.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- ---
100 10,000 10,000 20,000 100 100 200 100
200 10,000 15,000 25,000 50 75 125 50
300 10,000 30,000 40,000 33.3 100 133.3
400 10,000 50,000 60,000 25 125 150
500 10,000 90,000 100,000 20 180 200
600 10,000 140,000 150,000 16.7 233.3 250
Q
VC
Q
TCMC
![Page 15: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/15.jpg)
Production. Costs Problem 6 on p.194.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- --- ---
100 10,000 10,000 20,000 100 100 200 100
200 10,000 15,000 25,000 50 75 125 50
300 10,000 30,000 40,000 33.3 100 133.3 150
400 10,000 50,000 60,000 25 125 150 200
500 10,000 90,000 100,000 20 180 200 400
600 10,000 140,000 150,000 16.7 233.3 250 500
Q
VC
Q
TCMC
![Page 16: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/16.jpg)
If cost is given as a function of Q, then For example:
TC = 10,000 + 200 Q + 150 Q2
MC = ?
dQ
TCdMC
)(
![Page 17: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/17.jpg)
Profit is believed to be the ultimate goal of any firm. If the production unit described in the problem above can sell as many units as it wants for P=$360, what is the best quantity to produce (and sell)?
![Page 18: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/18.jpg)
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- --- ---
100 10,000 10,000 20,000 100 100 200 100
200 10,000 15,000 25,000 50 75 125 50
300 10,000 30,000 40,000 33.3 100 133.3 150
400 10,000 50,000 60,000 25 125 150 200
500 10,000 90,000 100,000 20 180 200 400
600 10,000 140,000 150,000 16.7 233.3 250 500
Profit is believed to be the ultimate goal of any firm. If the production unit described in the problem above can sell as many units as it wants for P=$360, what is the best quantity to produce (and sell)?
![Page 19: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/19.jpg)
Output FC VC TC
0 10,000 0 10,000
100 10,000 10,000 20,000
200 10,000 15,000 25,000
300 10,000 30,000 40,000
400 10,000 50,000 60,000
500 10,000 90,000 100,000
600 10,000 140,000 150,000
Doing it the “aggregate” way,by actually calculating the profit:
![Page 20: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/20.jpg)
Output FC VC TC TR
0 10,000 0 10,000
100 10,000 10,000 20,000
200 10,000 15,000 25,000
300 10,000 30,000 40,000
400 10,000 50,000 60,000
500 10,000 90,000 100,000
600 10,000 140,000 150,000
Doing it the “aggregate” way,by actually calculating the profit:
P=$360
![Page 21: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/21.jpg)
Output FC VC TC TR
0 10,000 0 10,000 0
100 10,000 10,000 20,000 36,000
200 10,000 15,000 25,000 72,000
300 10,000 30,000 40,000 108,000
400 10,000 50,000 60,000 144,000
500 10,000 90,000 100,000 180,000
600 10,000 140,000 150,000 216,000
Doing it the “aggregate” way,by actually calculating the profit:
P=$360
![Page 22: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/22.jpg)
Output FC VC TC TR Profit
0 10,000 0 10,000 0
100 10,000 10,000 20,000 36,000
200 10,000 15,000 25,000 72,000
300 10,000 30,000 40,000 108,000
400 10,000 50,000 60,000 144,000
500 10,000 90,000 100,000 180,000
600 10,000 140,000 150,000 216,000
Doing it the “aggregate” way,by actually calculating the profit:
P=$360
![Page 23: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/23.jpg)
Output FC VC TC TR Profit
0 10,000 0 10,000 0 –10,000
100 10,000 10,000 20,000 36,000 16,000
200 10,000 15,000 25,000 72,000 47,000
300 10,000 30,000 40,000 108,000 68,000
400 10,000 50,000 60,000 144,000 84,000
500 10,000 90,000 100,000 180,000 80,000
600 10,000 140,000 150,000 216,000 66,000
Doing it the “aggregate” way,by actually calculating the profit:
P=$360
![Page 24: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/24.jpg)
Output FC VC TC TR Profit
0 10,000 0 10,000 0 –10,000
100 10,000 10,000 20,000 36,000 16,000
200 10,000 15,000 25,000 72,000 47,000
300 10,000 30,000 40,000 108,000 68,000
400 10,000 50,000 60,000 144,000 84,000
500 10,000 90,000 100,000 180,000 80,000
600 10,000 140,000 150,000 216,000 66,000
Doing it the “aggregate” way,by actually calculating the profit:
P=$360
![Page 25: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/25.jpg)
Alternative: The Marginal ApproachThe firm should produce only units that are worth producing, that is, those for which the selling price exceeds the cost of making them.
Output FC VC TC AFC AVC ATC MC
0 10,000 0 10,000 --- --- --- ---
100 10,000 10,000 20,000 100 100 200 100
200 10,000 15,000 25,000 50 75 125 50
300 10,000 30,000 40,000 33.3 100 133.3 150
400 10,000 50,000 60,000 25 125 150 200
500 10,000 90,000 100,000 20 180 200 400
600 10,000 140,000 150,000 16.7 233.3 250 500
< 360
> 360
![Page 26: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/26.jpg)
Principle (Marginal approach to profit maximization): If data is provided in discrete (tabular) form, then profit is maximized by producing all the units for which and stopping right before the unit for which
![Page 27: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/27.jpg)
Principle (Marginal approach to profit maximization): If data is provided in discrete (tabular) form, then profit is maximized by producing all the units for which MR > MCand stopping right before the unit for which MR < MC In our case, price of output stays constant throughout therefore MR = P (an extra unit increases TR by the amount it sells for)
If costs are continuous functions of QOUTPUT, then profit
is maximized where
![Page 28: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/28.jpg)
Principle (Marginal approach to profit maximization): If data is provided in discrete (tabular) form, then profit is maximized by producing all the units for which MR > MCand stopping right before the unit for which MR < MC In our case, price of output stays constant throughout therefore MR = P (an extra unit increases TR by the amount it sells for)
If costs are continuous functions of QOUTPUT, then profit
is maximized where MR=MC
![Page 29: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/29.jpg)
What if FC is $100,000 instead of $10,000? How does the profit maximization point change?
Output FC VC TC TR Profit
0 10,000 0 10,000 0 –10,000
100 10,000 10,000 20,000 36,000 16,000
200 10,000 15,000 25,000 72,000 47,000
300 10,000 30,000 40,000 108,000 68,000
400 10,000 50,000 60,000 144,000 84,000
500 10,000 90,000 100,000 180,000 80,000
600 10,000 140,000 150,000 216,000 66,000
![Page 30: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/30.jpg)
What if FC is $100,000 instead of $10,000? How does the profit maximization point change?
Output FC VC TC TR Profit
0 100,000 0 10,000 0 –10,000
100 100,000 10,000 20,000 36,000 16,000
200 100,000 15,000 25,000 72,000 47,000
300 100,000 30,000 40,000 108,000 68,000
400 100,000 50,000 60,000 144,000 84,000
500 100,000 90,000 100,000 180,000 80,000
600 100,000 140,000 150,000 216,000 66,000
![Page 31: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/31.jpg)
What if FC is $100,000 instead of $10,000? How does the profit maximization point change?
Output FC VC TC TR Profit
0 100,000 0 100,000 0 –10,000
100 100,000 10,000 110,000 36,000 16,000
200 100,000 15,000 115,000 72,000 47,000
300 100,000 30,000 130,000 108,000 68,000
400 100,000 50,000 150,000 144,000 84,000
500 100,000 90,000 190,000 180,000 80,000
600 100,000 140,000 240,000 216,000 66,000
![Page 32: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/32.jpg)
What if FC is $100,000 instead of $10,000? How does the profit maximization point change?
Output FC VC TC TR Profit
0 100,000 0 100,000 0–100,000
100 100,000 10,000 110,000 36,000 –74,000
200 100,000 15,000 115,000 72,000 –43,000
300 100,000 30,000 130,000 108,000 –22,000
400 100,000 50,000 150,000 144,000 –6,000
500 100,000 90,000 190,000 180,000 –10,000
600 100,000 140,000 240,000 216,000 –24,000
![Page 33: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/33.jpg)
What if FC is $100,000 instead of $10,000? How does the profit maximization point change?
Output FC VC TC TR Profit
0 100,000 0 100,000 0–100,000
100 100,000 10,000 110,000 36,000 –74,000
200 100,000 15,000 115,000 72,000 –43,000
300 100,000 30,000 130,000 108,000 –22,000
400 100,000 50,000 150,000 144,000 –6,000
500 100,000 90,000 190,000 180,000 –10,000
600 100,000 140,000 240,000 216,000 –24,000
![Page 34: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/34.jpg)
Fixed cost does not affect the firm’s optimal short-term output decision and can be ignored while deciding how much to produce today.
Principle:
Consistently low profits may induce the firm to close down eventually (in the long run) but not any sooner than your fixed inputs become variable ( your building lease expires, your equipment wears out and new equipment needs to be purchased,
you are facing the decision of whether or not to take out a new loan, etc.)
![Page 35: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/35.jpg)
Sometimes, it is more convenient to formulate a problem not through costs as a function of output but through output (product) as a function of inputs used.
Problem 2 on p.194.
“Diminishing returns” – what are they?
In the short run, every company has some inputs fixed and some variable. As the variable input is added, every extra unit of that input increases the total output by a certain amount; this additional amount is called “marginal product”. The term, diminishing returns, refers to the situation when the marginal product of the variable input starts to decrease (even though the total output may still keep going up!)
![Page 36: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/36.jpg)
Total output, or Total Product, TP
Amount of input used
Amount of input used
Marginal product, MPRange of diminishing returns
![Page 37: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/37.jpg)
K L Q MPK
0 20 01 20 502 20 1503 20 3004 20 4005 20 4506 20 475
Calculating the marginal product (of capital) for the data in Problem 2:
![Page 38: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/38.jpg)
K L Q MPK
0 20 0 ---1 20 50 502 20 1503 20 3004 20 4005 20 4506 20 475
Calculating the marginal product (of capital) for the data in Problem 2:
![Page 39: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/39.jpg)
K L Q MPK
0 20 0 ---1 20 50 502 20 150 1003 20 300 1504 20 400 1005 20 450 506 20 475 25
Calculating the marginal product (of capital) for the data in Problem 2:
![Page 40: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/40.jpg)
In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)
Implications for the marginal cost relationship:
Worker #10 costs $8/hr, makes 10 units. MCunit =
![Page 41: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/41.jpg)
In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)
Implications for the marginal cost relationship:
Worker #10 costs $8/hr, makes 10 units. MCunit = $0.80
Worker #11 costs $8/hr, makes …
![Page 42: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/42.jpg)
In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)
Implications for the marginal cost relationship:
Worker #10 costs $8/hr, makes 10 units. MCunit = $0.80
Worker #11 costs $8/hr, makes 8 units. MCunit =
![Page 43: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/43.jpg)
In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)
Implications for the marginal cost relationship:
Worker #10 costs $8/hr, makes 10 units. MCunit = $0.80
Worker #11 costs $8/hr, makes 8 units. MCunit = $1
In the range of diminishing returns, MP of input is falling and MC of output is increasing
![Page 44: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/44.jpg)
Marginal cost, MC
Amount of output
Amount of input used
Marginal product, MPThis amount of output corresponds to this amount of input
![Page 45: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/45.jpg)
When MP of input is decreasing, MC of output is increasing and vice versa.
Therefore the range of diminishing returns can be identified by looking at either of the two graphs.(Diminishing marginal returns set in at the max of the MP graph, or at the min of the MC graph)
![Page 46: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/46.jpg)
Back to problem 2, p.194.To find the profit maximizing amount of input (part d), we will once again use the marginal approach, which compares the marginal benefit from a change to the marginal cost of than change.More specifically, we compare VMPK, the value of marginal product of capital, to the price of capital, or the “rental rate”, r.
K L Q MPK VMPK r0 20 0 ---1 20 50 502 20 150 1003 20 300 1504 20 400 1005 20 450 506 20 475 25
![Page 47: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/47.jpg)
Back to problem 2, p.194.To find the profit maximizing amount of input (part d), we will once again use the marginal approach, which compares the marginal benefit from a change to the marginal cost of than change.More specifically, we compare VMPK, the value of marginal product of capital, to the price of capital, or the “rental rate”, r.
K L Q MPK VMPK r0 20 0 --- ---1 20 50 50 1002 20 150 100 2003 20 300 150 3004 20 400 100 2005 20 450 50 1006 20 475 25 50
![Page 48: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/48.jpg)
Back to problem 2, p.194.To find the profit maximizing amount of input (part d), we will once again use the marginal approach, which compares the marginal benefit from a change to the marginal cost of than change.More specifically, we compare VMPK, the value of marginal product of capital, to the price of capital, or the “rental rate”, r.
K L Q MPK VMPK r0 20 0 --- ---1 20 50 50 100 752 20 150 100 200 753 20 300 150 300 754 20 400 100 200 755 20 450 50 100 756 20 475 25 50 75
>>>>>< STOP
![Page 49: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/49.jpg)
Back to problem 2, p.194.To find the profit maximizing amount of input (part d), we will once again use the marginal approach, which compares the marginal benefit from a change to the marginal cost of than change.More specifically, we compare VMPK, the value of marginal product of capital, to the price of capital, or the “rental rate”, r.
K L Q MPK VMPK r0 20 0 --- ---1 20 50 50 100 752 20 150 100 200 753 20 300 150 300 754 20 400 100 200 755 20 450 50 100 756 20 475 25 50 75
>>>>>< STOP
![Page 50: Production. Costs Problem 6 on p.194.](https://reader036.vdocuments.net/reader036/viewer/2022062408/56813cce550346895da6757b/html5/thumbnails/50.jpg)
Why would we ever want to be in the range of diminishing returns?
Consider the simplest case when the price of output doesn’t depend on how much we produce. Until we get to the DMR range, every next worker is more valuable than the previous one, therefore we should keep hiring them. Only after we get to the DMR range and the MP starts falling, we should consider stopping.Therefore, the profit maximizing point is always in the diminishing marginal returns range!
Surprised?