CostMinEx07 - Cost minimization - Example Given a...

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Cost minimization - Example Given a technology f ( L, K ) there are many ways the f rm could produce y units of output (all combinations of inputs that yield this output level form an isoquant curve f ( L, K )= y ). With input prices, w L and w K each combination of inputs would have a di f erent cost. To produce any output level y ,apro f t maximizing f rm would choose the combination of inputs that produces y at the lowest possible expenditure on the inputs. We de f ne this to be the cost of producing y , c ( y ) . We provide here an example of f nding the cost c ( y ) for a Cobb-Douglas production technology f ( L, K )= LK. We distinguish between a short run situation, when one of the inputs, say capital, is f xed at some level K, and the long run when both input levels can be chosen optimally. Short run - The short run cost is the solution to: min L w L L + w K K s.t. L 0 and LK = y. The technology constraint here dictates that

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This note was uploaded on 02/23/2008 for the course ECON 3130 taught by Professor Masson during the Spring '06 term at Cornell University (Engineering School).

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CostMinEx07 - Cost minimization - Example Given a...

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