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Does the production function display increasing or decreasing returns to scale?0%0%ECON 410 Cost-Minimization“A thing is worth what it can do for you, not what you choose to pay for it.”–John Ruskin1. Increasing2. Decreasing2Class 19 - Cost Minimization (Graphical)Consider the 2-input Cobb-Douglas production function, f(x1,x2)=x11/3x21/2. Does the production function display increasing, decreasing, or constant returns to scale?3Class 19 - Cost Minimization (Graphical)There’s an eLecture on Returns to ScaleThere’s an eLecture on Returns to Scale4Midterm 2 on Thursday. Topics from today (and last class) will not be on it.Midterm 2 on Thursday. Topics from today (and last class) will not be on it.Class 19 - Cost Minimization (Graphical)5If you were on the overflow list before, you’re still on it.2:00-3:15 Phillips 2153:30-4:45 Gardner 105If you were on the overflow list before, you’re still on it.2:00-3:15 Phillips 2153:30-4:45 Gardner 105Class 19 - Cost Minimization (Graphical)6Please triple check that you correctly bubbled in your pid (you can do that before you come into the room) and your sequence number on your scantron.Please triple check that you correctly bubbled in your pid (you can do that before you come into the room) and your sequence number on your scantron.Class 19 - Cost Minimization (Graphical)Also, make sure all your Long-Form work is in your packet (NOT your blue-book…that’s just for scrap).Also, make sure all your Long-Form work is in your packet (NOT your blue-book…that’s just for scrap).7Midterm 2What to Bring:What to Bring:8Midterm 2What to Bring:What to Bring:For scrap paper9Midterm 2What to Bring:What to Bring:Front of an 8.5” sheet of paper.Anything on it visible to your naked eye.10Midterm 2What NOT to Bring:What NOT to Bring:Do NOT Bring YourMidterm 1 Cheat Sheet11Midterm 2What to Bring:What to Bring:12Midterm 2What to Bring:What to Bring:13Midterm 2What to Bring:What to Bring:14Midterm 2What NOT to Bring:What NOT to Bring:15Midterm 2What’s on the Midterm?What’s on the Midterm?10 Multiple Choice (4 points each)2 Long-Form (10 points each)Covering topics from HW4-HW5.60 Total Points16Midterm 2Do I need to know…?Do I need to know…?If we hardly mentioned it and nothing remotely similar appeared on a HW, it’s not going to be on the Midterm.If it’s specific to HW1-HW3 and you have not seen it in any form on HW4-HW5, it’s not going to be on the Midterm. For instance, I won’t ask you a question about monotonicity.17Midterm 2StrategyStrategy18Class 19 - Cost Minimization (Graphical)Production FunctionsReturns to ScaleSpecific Production FunctionsIsoquantsStructure of Isoquants19Individual ChoiceIndividual ChoiceFirm ChoiceFirm ChoiceGame TheoryGame TheoryClass 19 - Cost Minimization (Graphical)MarketingMarketingSalesSalesDistributionDistributionOperationsOperationsFinanceFinanceHuman ResourcesHuman ResourcesITITR&DR&DGiven that we must produce a specific amount of our product, what’s the cheapest way to do it?20Individual ChoiceIndividual ChoiceFirm ChoiceFirm ChoiceWhat you wantWhat you wantFoundationFoundationStructureStructurePatternsPatternsWhat you can haveWhat you can haveBudget SetBudget SetBudget LineBudget LineWhat you will chooseWhat you will chooseOptimal BundleOptimal BundleBehavior ChangesBehavior ChangesWhy you will chooseWhy you will chooseGame TheoryGame TheoryIndividual ChoiceIndividual ChoiceFirm ChoiceFirm ChoiceWhat you wantWhat you wantFoundationFoundationStructureStructurePatternsPatternsWhat you can haveWhat you can haveFoundationFoundationStructureStructurePatternsPatternsWhat you will chooseWhat you will chooseOptimal BundleOptimal BundleBehavior ChangesBehavior ChangesWhy you will chooseWhy you will chooseGame TheoryGame TheoryClass 19 - Cost Minimization (Graphical)Given that we must produce a specific amount of our product, what’s the cheapest way to do it?21Individual ChoiceIndividual ChoiceFirm ChoiceFirm ChoiceWhat you wantWhat you wantFoundationFoundationStructureStructurePatternsPatternsWhat you can haveWhat you can haveBudget SetBudget SetBudget LineBudget LineWhat you will chooseWhat you will chooseOptimal BundleOptimal BundleBehavior ChangesBehavior ChangesWhy you will chooseWhy you will chooseGame TheoryGame TheoryIndividual ChoiceIndividual ChoiceFirm ChoiceFirm ChoiceWhat you wantWhat you wantFoundationFoundationStructureStructurePatternsPatternsWhat you can haveWhat you can haveFoundationFoundationStructureStructurePatternsPatternsWhat you will chooseWhat you will chooseOptimal BundleOptimal BundleBehavior ChangesBehavior ChangesWhy you will chooseWhy you will chooseGame TheoryGame TheoryClass 19 - Cost Minimization (Graphical)Given that we must produce a specific amount of our product, what’s the cheapest way to do it?22Class 19 - Cost Minimization (Graphical)Production FunctionGiven a fixed level of inputs, x1, x2, …, xn a firm’s Production Function, f(x1, x2, …, xn), gives the maximum amount of output, y, the firm can produce. In other words, y=f(x1, x2, …, xn ) is the amount of output, y, that can be efficiently produced using x1, x2, …, xn .23No Free Lunch•Cannot produce something for nothing.No Free Lunch•Cannot produce something for nothing.Possibility of Inaction•No sunk costs.Possibility of Inaction•No sunk costs.Free Disposal•Inputs can be disposed of for no cost.Free Disposal•Inputs can be disposed of for no cost.Convexity•Balanced production plans are weakly preferred.Convexity•Balanced production plans are weakly