Tough Decisions The Economic Reasoning Behind Firms Decisions

Our Experiment Model Principles of: – Production Function – Supply Curve – Average Total Cost Curve Conditions – – Wage = $5 per hour Hour = 1 minute Capital fixed at 3 staplers Demand is constant

Regression Least Squares Problem: Optimization –

Production Function: Q(L) – Regression Q’(L) = MP(L) Law of Diminishing Return Laborer gets hired when P x Q’(L) = Wage

L 0 1 2 3 4 5 Q P W 0 $0. 5 0 $5 17 $0. 5 0 36 54 69 80 $0. 5 0 $5 $5 $5 VM P MP L L TR - - - ∆Pr o f i t - 17 $8. 5 $3. 5 0 0 0 19 $18. 0 $4. 5 $9. 5 0 0 0 18 $27. 0 $4. 0 $9. 0 0 15 $34. 5 $2. 5 $7. 5 0 0 0 11 $40. 0 $0. 5 $5. 5 0 0 0 - $0. 5 $4. 0 $44. 0 $ 1. 0

Regression Equation for Production Function

Integrals Area under the curve: cost – Area above the curve: surplus – Box minus cost

The Supply Curve Constant Demand Supply as a function – MC(Q) – As quantity rises, input costs rise too – Regression Producer Surplus – Benefit – Equilibrium – Integrals Cost of Production

Producer Surplus using definite integrals

Cost and Profit Average Total Cost – Total Cost / Quantity Variable Cost Fixed Cost – Curve Shape 2 nd degree polynomial Concave up Profit – Quantity multiplied by the difference in price and average total cost

Conclusions The models were correct!!!!