The analysis of - The Analysis of Costs The Firm's Costs The production function provides the firm with a technical tradeoff-the MRTS-between labor

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The Analysis of Costs
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The Firm’s Costs The production function provides the firm with a technical tradeoff—the MRTS—between labor and capital for a given output. But this does not answer the question, how should the firm produce each level of output? We have seen that the decision should be taken where MC=MR. Then the firm requires knowledge of costs of the inputs, of the prices of labor, capital, materials, and so on.
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Recall the managerial economist’s concept of cost: Cost is the value of the best alternative use of our resources. This concept of cost is known as opportunity cost . We distinguish between Explicit Costs (accounting costs or firm’s expenses) and Implicit Costs (opportunity cost of resources owned by the firm). For decision making the concept of cost covers not just historical (explicit) costs but also opportunity costs. In practice, sometimes the last are omitted (or partially omitted) from the analysis. Costs can then be misleading.
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Opportunity and Sunk Costs A store is worth 2.5 million dollars if held and 3.5 million if sold. Opportunity cost suggests that the store be sold. Sunk costs ( costs are costs that have already been incurred and which cannot be recovered to any significant degree) are however, irrelevant in the decision. It is not what was paid in the past for the store that matters, but its value in the present and future.
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Main Question in Cost Analysis: How do Costs relate to Changes in Output? We saw that in the Short-Run, at least one input is fixed (usually quantities of capital, like size of plant and equipment) while in the Long-Run, all inputs are variable. The analysis of production functions – evolution
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This note was uploaded on 04/07/2008 for the course ECON 2010 taught by Professor Devkota during the Spring '08 term at Rensselaer Polytechnic Institute.

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The analysis of - The Analysis of Costs The Firm's Costs The production function provides the firm with a technical tradeoff-the MRTS-between labor

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