The price of paper used by a cost-minimizing firm increases....

Name: Problem 4, Chapter 20: Intermediate Microeconomics: A Modern Approach
Uploaded: 2022-02-15T13:19:26-08:00
Duration: 6 min 19 s
Channel: Jonathan Tapiwa
Description: The price of paper used by a cost-minimizing firm increases. The firm responds to this price change by changing its demand for certain inputs, but it keeps its output constant. What happens to the firm's use of paper?

The price of paper used by a cost-minimizing firm increases. The firm responds to this price change by changing its demand for certain inputs, but it keeps its output constant. What happens to the firm's use of paper?

Key Concepts

Marginal Rate of Technical Substitution (MRTS)

MRTS is the rate at which a firm can substitute one input for another while maintaining the same level of output. In response to changes in input prices, the optimal input combination is achieved when the MRTS equals the ratio of the input prices. An increase in the price of one input typically results in a lower quantity of that input being used, as the cost of maintaining the desired output with that input becomes higher relative to its substitute.

Input Substitution Effect

The input substitution effect refers to the adjustment in the quantities of inputs used by a firm in response to a change in relative input prices, with the firm's output level held constant. When the price of one input increases, the firm tends to reduce its use of that input and substitute towards relatively cheaper alternatives, provided they are substitutable in the production process.

Cost Minimization

Cost minimization is the process by which a firm chooses the combination of inputs that will produce a given level of output at the lowest possible cost. When an input price changes, the firm re-evaluates its input mix to continue producing the required output as economically as possible, ensuring that the marginal products per dollar spent on each input are equalized.

Transcript

00:01 Okay, so we're looking here at a firm that uses a combination of paper plus other factors, plus other inputs to produce a certain product.

00:17 So the information that has been provided for us is that the price of paper used by a cost -minimizing firm increases.

00:27 Okay, so it is a cost -minimizing firm.

00:37 Okay, it's a cost -minimizing firm.

00:44 Firm which simply tells us that the iso quant and the iso cost are tangent to each other.

01:01 All right.

01:01 So that's going to be important.

01:02 We'll show that in the diagram pretty soon.

01:06 So the other information that we are given is that the output is constant.

01:20 Okay.

01:20 So the analysis that we now need to look at is what happens to the firm's use of paper.

01:26 If the firm decides to change its demand, you know, or i mean, the firm responds to the increase in the price of paper used by this firm, by changing its demand for certain inputs, okay? i think that is telling.

01:47 So the first thing that we'll need to just identify with is the relationship between the use of paper and that of other inputs.

01:59 So i think just drawing an ordinary curve to illustrate the relationship, we could start off with on the vertical axis.

02:13 Let's find out how the other inputs can be shown to relate with paper.

02:25 So we can look at an original.

02:27 Scenario where we have for instance the iso, let me just draw it a little bit flatter so it's easier to illustrate here...

Please give Ace some feedback