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Special Cases, Returns to Scale

perfect substitutes - linear isoquants  

  • isoquants
  • constant MRTS
  • diminishing MRTS doesn't apply
  • not necessarily a one to one exchange though

fixed-proportions production function - like perfect complements in consumer theory  

  • isoquants
  • impossible to make substitutions among inputs (ie. recipes)
  • each output requires a specific combo of inputs
  • both inputs must be increased to increase output >> limited methods of production

returns to scale - shows how output is increased by input  

  • increasing returns to scale - output more than doubles when inputs doubled
    • for example, Q = KL >> (2K)(2L) = 4KL = 4Q
    • common in large scale operations (w/ very specialized operations)
  • constant returns to scale - output doubled when inputs doubled
    • for example, Q = K+L >> (2K)+(2L) = 2(K+L) = 2Q
    • size of firm doesn't affect productivity
  • decreasing returns to scale - output less than doubled when inputs doubled
    • for example, Q = (KL)1/3 >> (2K x 2L)1/3 = 41/3Q
Subject: 
Economics
Subject X2: 
Economics

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