Problem Set #3 Due Monday
Review Total, Average, Marginal Product,
I. What is the Relation between Product and Cost?
II
.
Using the “
Golden Rule for Cost Minimization”
III.
Short Run
Total, Average and Marginal Cost Curves
I. What is the Relation between Product and Cost?
A. Product is determined by the production function
Q* = F(K*, L*, E*, M*); use K*,L*,E*,M* get to get Q*
B. Total cost of Q* is simply the total cost of the K*,
L*,E*, and M* inputs or C(Q*) = wL*+rK*+p
E
E*+p
M
M*
Where w=wage, r=rental price of K, p’s are price of E & M
C.
Assume that the marginal products of labor and
capital are MP
L
and MP
K
respectively, then…
D.
w/MP
L
= MC
L
= marginal cost of producing output
using labor and r/MP
K
= MC
K
= marginal cost of producing
output using capital
E. Necessary condition to minimize cost of producing
given output is that the marginal cost of producing output
must be equal for all inputs used or the
Golden Rule for Cost Minimization
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 Fall '07
 Yezer
 Economics, Economics of production, Cost curve

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