PART 4: PRODUCERS

1
PART 4 PRODUCERS DECISIONSWK 6-4 INPUT -
INPUT
AED 200 PRIN OF FOOD RESOURCES ECONOMICS
2
Optimum Resource RulesFor Maximum Profit
Wk 6-3 Iso- Quants And Budget Lines
Review

• 1. One Resource Producing One Product
• A. Optimum Input Level Add Inputs Until
• B. Optimum Profit Level Inc Production Until
• C. Optimum Output Level Add Inputs Until The

Marginal Value Product Added Cost
Total Revenue - Total Cost Maximum
Added Cost (Marg Cost) Selling Price (Marg Rev)
3
II. Input- Input DecisionsOptimum Level Of Two
Resources(Input Substitution)
Wk 6-4 Multiple Resource Combination
A. Yf(x1,x2 X3..Xn)

• B. The Input Substitution Model Says That
  Different Combinations Of Two Inputs Will Yield
  The Same Level Of Output.

C. There Are 3 Methods To Determine The Optimum
(Maximum Profits) Combination Of Two Inputs.
4
1. Least Cost Combination Method

• Find Total Cost By Adding The Cost
• For Each Of The Two Inputs.

Input 1 Hay No Price Cost 0 5.00
1 5.00 2 5.00 3 5.00 4
5.00 5 5.00 6 5.00 7 5.00
Input 2 Grain No Price Cost 70 1.00
40 1.00 26 1.00 20 1.00
17 1.00 15 1.00 13 1.00 11 1.00
Total Cost

• Milk
• 100
• 100
• 100
• 100
• 100
• 100
• 100

70.00
0.00
70.00
45.00
5.00
40.00
36.00
10.00
26.00
35.00
20.00
15.00
37.00
20.00
17.00
40.00
25.00
15.00
43.00
13.00
30.00
35.00
11.00
46.00
B. Rule
Pick Least Cost Combination
5
2. Marginal Rate Of Substitution
A. Calculate The Marg Rate OfSubstitution The
Inverse Price Ratio
Marg Rate Tech Sub Xxx
X1 Hay 0 1 2 3 4 5 6
X2 Gr 70 40 25 20 17 15 13

• Price Ratio
• Xxx
• 5
• 5
• 5
• 5
• 5
• 5

Marg Xxx
Chg Xxx

• Milk
• 100
• 100
• 100
• 100
• 100
• 100
• 100

30
30/130
1
1
15
15/115

1
5
5/15

1
3
3/13
1
2
2/12
1
2
2/12
Find Where Marginal Rate Of Substitution Is
Closest To Inverse Price Ratio
Rule
6
3. Graphic Method
Optimum Point
Rule The Optimum Point Of Production(Max
Profits Is Where The Iso-cost Is Tangent To The
Iso-quant)
7
Optimum Resource RulesFor Maximum Profit
Wk 6-3 Iso- Quants And Budget Lines
Review

• 1. One Resource Producing One Product
• A. Optimum Input Level Add Inputs Until
  Value Of Added Output Added Cost
• B. Optimum Profit Level Inc Production Until
  Total Rev - Total Cost Max
• C. Optimum Output Level Add Inputs Until The
  Added Cost (Marg Cost) Selling Price

2. One Resource Producing Two Products
A. Pick Least Cost Combination
B. Match Substitute Ratio To Price Ratio
C. Iso-quant Tangent To Iso-cost
8
Part 4 Producers Decisions

• Topic A Input Product Relationship

Topic B Input Input Relationship Wk 6-3 Iso-
Quants And Budget Lines Wk 6-4 Multiple
Resource Combination
Topic C Productproduct Relationship Wk 6-5
Production Poss Curve Wk 7-1 Optimum Product
Combinations Wk 7-2 Review Of Producers
Optimums Wk 7-3 Producers Surplus Review
Wk 7-4 Second Midterm
9
Wk 6-4 Multiple Resource Combination
Learning Objectives
After The Discussion, The Student Should Be Able
To
1. Discuss Changes In The Iso-quant Curve.
2. Determine The Impact Of Changes In Budgets And
Prices On The Iso-cost Line.
3. Determine The Optimum Resource Combination Of
Multiple Inputs.
10
IV. Changes Affecting The Input - Input Model
Discuss Changes In The Iso-quant Curve.
Obj
1
(A. Increases In Production)

• To Represent Increases In Production, You Would
  Draw Iso-

120 Bu Corn
140 Bu Corn
Input X2
Fertilizer
Quants At Higher Levels
Iso-Q2
Iso-Q1
1. Technology
Input X1
Manure
11
Changes Affecting The Input - Input Model(B.
Increases In Budgets)
Determine The Impact Of Changes In Budgets And
Prices On The Iso-cost Line.
Obj
2

• To Represent Increases In A Budget, You Would
  Draw Iso-

Cost Lines At
Higher Levels
Iso-Cost2
Orginal Input 1 Input 2 Budget 10 10 Price
.10 1.00 Iso-cost 100 10
Input X2
Change Input 1 Input 2 Budget 20 20 Price
.10 1.00 Iso-cost 200 20
Iso-Cost1
Input X1
12
(C. Increases In Price Of X1 )
Determine The Impact Of Changes In Budgets And
Prices On The Iso-cost Line.
Obj
2

• Increases In Price Of X1, Will Cause The
  Iso-cost Line To Pivot Left. As A Result, You
  Will Be Able To Buy Less Of Input X1. Thus The
  Iso - Cost Line Will Be Tangent To A Lower
  Iso-quant Line (Less Production)

Orginal Input 1 Input 2 Budget 10 10 Price
.10 1.00 Iso-cost 100 10
Input X2
Change Input 1 Input 2 Budget 10 10 Price .
20 1.00 Iso-cost 50 10
Input X1
13
(D. Decreases In Price Of X1 )
Determine The Impact Of Changes In Budgets And
Prices On The Iso-cost Line.
Obj
2

• Decreases In Price Of X1, Will Cause The Iso-cost
  Line To Pivot Right. As A Result, You Will Be
  Able To Buy More Of Input X1. Thus The Iso - Cost
  Line Will Be Tangent To A Higher Iso-quant Line
  (More Production)

Orginal Input 1 Input 2 Budget 10 10 Price
.10 1.00 Iso-cost 100 10
Input X2
Change Input 1 Input 2 Budget 10 10 Price
.05 1.00 Iso-cost 200 10
Input X1
14
(E. Increases In Price Of X2 )
Determine The Impact Of Changes In Budgets And
Prices On The Iso-cost Line.
Obj
2

• Increases In Price Of X2, Will Cause The Iso-cost
  Line To Pivot Down As A Result, You Will Be Able
  To Buy Less Of Input X2. Thus The Iso - Cost
  Line Will Be Tangent To A Lower Iso-quant Curve
  (Less Production)

Orginal Input 1 Input 2 Budget 10 10 Price
.10 1.00 Iso-cost 100 10
Input X2
Change Input 1 Input 2 Budget 10 10 Price
.1 2.00 Iso-cost 100 05
Input X1
15
(F. Decreases In Price Of X2 )
Determine The Impact Of Changes In Budgets And
Prices On The Iso-cost Line.
Obj
2

• Decreases In Price Of X2, Will Cause The Iso-cost
  Line To Pivot Up As A Result, You Will Be Able To
  Buy More Of Input X2. Thus The Iso - Cost Line
  Will Be Tangent To A Higher Iso-quant Curve
  (More Production)

Orginal Input 1 Input 2 Budget 10 10 Price
.10 1.00 Units 100 10
Input X2
Change Input 1 Input 2 Budget 10 10 Price
.1 .50 Units 100 20
Input X1
16
Determine The Optimum Resource Combination Of
Multiple Inputs.
Obj
3

• A. The Input-input Model Is Not Complex Enough To
  Approximate The Real World, So We Will Propose A
  Multiple Input Model.

B. Regardless Of How Many Resources We Have, Or
How Much Money We Have We Never Want To Spend
More On A Resource Than What We Get Back, I.E.,Go
Below The Break Even Point
C. The Numerator In Each Set Numbers Represents
The Added Returns (Benefits) From Making The
Added Investment In The Denominator
D. Calculate The Rate Of Return Added Returns
(Benefits) Added Investment (Cost)
17
Multiple Resource Optimization
Determine The Optimum Resource Combination Of
Multiple Inputs.
Obj
3

• Nitrogen Phosphorous Potassium

• 1400 1.40 1400 2.80 1500 5.00 (MR)
• 1000 1.00 500 1.00 300 1.00 (MC)

3
4
1
1200 1.20 520 1.40 1000 3.30
(MR) 1000 1.00 500 1.00 300
1.00(MC)
5
6
2
900 .90 510 1.02 330 1.10
(MR) 1000 1.00 500 1.00 300
1.00(MC)
8
7
500 .50 501 1.002 250 0.83
(Mr) 1000 1.00 500 1.00 300
1.00(MC)
9
18
Optimum Resource RulesFor Maximum Profit
Determine The Optimum Resource Combination Of
Multiple Inputs.
Obj
3
A. Rule One Which One?
Allocate Your Resource Money To The Resource That
Has The Highest Rate Of Return
B. Rule Two How Much?
Allocate According To Rule One Until You Reach
Breakeven For Each Resource Or You Run Out Of
Money
19
OPTIMUM RESOURCE RULESFOR MAXIMUM PROFIT

• 1. ONE RESOURCE PRODUCING ONE PRODUCT
• A. OPTIMUM INPUT LEVEL ADD INPUTS UNTIL
  VALUE OF ADDED OUTPUT ADDED COST
• B. OPTIMUM PROFIT LEVEL INC PRODUCTION UNTIL
  TOTAL REV - TOTAL COST MAX
• C. OPTIMUM OUTPUT LEVEL ADD INPUTS UNTIL THE
  ADDED COST (MARG COST) SELLING PRICE

2. TWO RESOURCE PRODUCING ONE PRODUCTS
A. PICK LEAST COST COMBINATION
B. MATCH SUBSTITUTE RATIO TO PRICE RATIO
C. ISO-QUANT TANGENT TO ISO-COST
3. MULTIPLE RESOURCES PRODUCING ONE PRODUCT
A. ALLOCATE TO RESOURCE WITH HIGHEST RETURN B.
ALLOCATE UNTIL BREAK-EVEN FOR ALL RESOURCES
OR YOU RUN OUT OF MONEY