Econ 281 Chapter7c - Choosing 1 input in the short run...

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1 Short Run Cost Minimization Cost minimization occurs in the short run when one input (generally capital) is fixed (K*). Total variable cost is the amount spent on the variable input(s) (ie: wL) -this cost is nonsunk Total fixed cost is the amount spent on fixed inputs (ie: rK*) -if this cost cannot be avoided, it is sunk -if this cost can be avoided, it is nonsunk (ie: rent factory to another firm)
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2 Short Run Cost Minimization Cost minimization in the short run is easy: Min TC=wL+rK* L s.t. the constraint Q=f(L,K*) Where K* is fixed.
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3 Short Run Cost Minimization Example: Minimize the cost to build 80 units if Q=2(KL) 1/2 and K=25. Q=2(KL) 1/2 80=2(25L) 1/2 80=10(L) 1/2 8=(L) 1/2 16=L Notice that price doesn’t matter.
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4 Short Run Cost Minimization L K TC 1 /w TC 2 /w TC 2 /r TC 1 /r Long-Run Cost Minimization K* Short-Run Cost Minimization
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5 Short Run Expansion Path
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Unformatted text preview: Choosing 1 input in the short run doesnt depend on prices, but it does depend on quantity produced. The short run expansion path shows the increased demand for labour as quantity produced increases: (next slide) The demand for inputs will therefore vary according to quantity produced. (The 6 Example: Short and Long Run Expansion Paths L K TC /w TC 1 /w TC 2 /w TC 2 /r TC 1 /r TC /r Short Run Expansion Path Long Run Expansion Path K* 7 Short Run and Many Inputs If the Short-Run Minimization problem has 1 fixed input and 2 or more variable inputs, it is handled similarly to the long run situation: Food Food L B Input B Input A Input A Input : rs your worke feed You : etc. P MP w MP ie P MP P MP = =...
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Econ 281 Chapter7c - Choosing 1 input in the short run...

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