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Lecture 9

ECO 102 Lecture 9: producertheoryinputintensityandsubstitution

5 pages74 viewsFall 2017

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Input Price Changes and the Role of Substitution and Input Intensity: A Comparison of Three Firms
V. Bardis
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From p = 8, w = 1, r = 1 to p = 8, w = 2, r =1
Percent Changes
At the starting point, all firms have the same
capital-to-labour ratio.
After the increase in the price of labour,
the firm with the greater ease of substitution
reduces its labour by a larger percent,
reduces its output by a smaller percent,
and experiences the smaller percent
reduction in profit.
Why? Greater ease of substitution enables a
firm to partially offset/avoid the input price
increase by more than the other firms.
Scenario A
Labour Demand Curves
Blue for Joy
Green for Elroy
Red for Zoy
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