1. Business
  2. Economics
  3. we can generally demonstrate a relationship between scale elasticity and...

Question: we can generally demonstrate a relationship between scale elasticity and...

Question details

We can generally demonstrate a relationship between scale elasticity and the slope of the average cost curve. Here, well demonstrate the result for only one input. Consider a (continuously differentiable and strictly increasing) production function F(L), where L denotes labor. 4. e) letting w denote the wage rate for labor, we can note that t f is cwL, q F(L) where L is the amount of labor necessary to produce q units of output, i.e. so that What is the derivative of cost with respect to labor, i.e. what is ? dC dwL (b) Noting that q F(L), we can define MPLF (L) as the marginal product of labor. Demonstrate that: dC w mc =_=MPL Hint: Look at slide 10 of lecture 2, and apply the result from part (a). AC (c) Show that Escale, where Escale denotes the scale elasticity. (d) Why can we conclude that a scale elasticity greater (less than) one will cause average cost to decrease (resp. increase?

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution