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An Introduction to Cost and Production Functions by David F. Heathfield

By David F. Heathfield

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The law of diminishing return was first discussed by two classical economists : Ricardo (1846) and von Thunen (1826). But see also Joan Robinson (1960). 1 Optimisation Having outlined the range of choices open to an entrepreneur (the production function), we shall now investigate the economic side of production, that is the choice of a technology and a level of output from among the many possible. The fundamental decision unit here is the firm, and we will assume that the firm's sole aim is to maximise profit.

This is the same as saying that factor productivity increases up to q = 4 and decreases thereafter or that the process exhibits increasing returns to scale in the interval D-4 (units of output) and decreasing returns to scale for output levels greater than four units. Transforming this to the isoquant map we might say that increasing returns to scale means that the isoquant map becomes more and more dense as output grows, while the opposite is true for decreasing returns. Note Constant returns to scale does not imply invariate returns to scale.

1 Optimisation Having outlined the range of choices open to an entrepreneur (the production function), we shall now investigate the economic side of production, that is the choice of a technology and a level of output from among the many possible. The fundamental decision unit here is the firm, and we will assume that the firm's sole aim is to maximise profit. Profit is defined as the difference between total revenue (TR) and total cost (TC). e. prices offactors and output) and partly by the technological choice set represented by the production function .

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