Inverse demand function, Microeconomics

Assignment Help:

Inverse Demand Function: If variable factor prices changes, then the isocost line will tilt and consequently, the optimal factor requirement will be different. Suppose the wage rate of labor is allowed to vary. The resulting locus of profit maximizing amount of labor is referred to as the inverse demand function for labor. It measures what the price of labor must be to get certain units of labor, when the level of the other factor is fixed.

2183_Inverse Demand Function.png


• Expansion Path: This line shows how the factor combinations utilized by a firm changes as it expands its level of output. It is the locus of points of tangency between the isoquants and isocost lines.

• Price Factor Curve (PFC): Holding total cost fixed, factor prices are allowed to vary. If e change the price of L and hold the price of K fixed then the isocost will tilt. The locus of optimal factor combination points is known as the price factor cost. Note that this is the long run equivalent of the inverse demand function.

663_Inverse Demand Function1.png

• Effect of Change in the Factor Price: The total effect of a change in the price of a factor can be divided in 2 - the expansion or output effect and the technical substitution effect. The output effect refers to the changes caused due to the alterations in the total cost. Technical substitution effect is the result of the change in the relative price of the factors. This is similar to the effect of changes in the price of a commodity that we mentioned under Slutsky equation.

• Expenditure Elasticity :This measures the percentage change in the factor used in response to the change in the total cost. If this value is greater than 0 then the factor is superior, otherwise it is inferior.


Related Discussions:- Inverse demand function

Theory of firm, critically analysis firm theory of profit maximization?

critically analysis firm theory of profit maximization?

What is the price of a call option on stock, Consider an economy with three...

Consider an economy with three states. The following set of stocks is traded:   x 1 =(2,2,0)    x 2 =(1,0,3)  x 3 =(0,2,4). The t=0 prices of these stocks are given as follow

Fiscal imbalance, Fiscal Imbalance: The persistent rise in resource ga...

Fiscal Imbalance: The persistent rise in resource gap has led to a growing volume of public debt. The central feature that emerges is a serious fiscal imbalance, arising from

Bookseller, Nile.com, the online bookstore, wants to increase it''s total r...

Nile.com, the online bookstore, wants to increase it''s total revenue. One strategy is to offer a 10% discount on every book that sells. Nile.com knows it''s customers can be divid

Select demand schedule and a supply schedule for apples, •Create a demand s...

•Create a demand schedule and a supply schedule for your product.. •Using these schedules, draw a demand curve and a supply curve using PowerPoint or Excel. Use these to determine

Role of marginal propensity to consume in accounting for gro, how can we br...

how can we bring in the marginal propensity to consume

Game theoretic approach , Normal 0 false false false EN...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Demand function is homogeneous of degree zero, Demand Function is Homogeneo...

Demand Function is Homogeneous of Degree Zero: Mathematical Presentation  we will show that demand function is homogeneous of degree zero in prices and money income. In o

Wages, What is the difference between wages and salaries

What is the difference between wages and salaries

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd