Econ 281 Chapter8a

# Econ 281 Chapter8a - Chapter 8 Cost Curves In the long run...

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1 Chapter 8: Cost Curves In the long run, a firm’s costs equal zero when zero production is undertaken As production (Q) increases, the firm must use more inputs, thus increasing its cost By minimizing costs, a firm’s long run cost curve is as follows:

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2 Q (units per year) L (labor services per year) K TC (\$/yr) 0 0 LR Total Cost Curve Q 0 Q 1 TC 0 =wL 0 +rK 0 L 0 L 1 K 0 K 1 Q 0 Q 1 TC = TC 1 TC = TC 0 TC 1 =wL 1 +rK 1
3 An increase in the price of only 1 input will cause  a firm to change its optimal choice of inputs However, the increase in input costs will always  cause a firm’s costs to increase: -(This is only not true in the case of perfect  substitutes when the productivity per dollar of  each substitute is originally equal)

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4 L K Q 0 0 B A TC 0 /r TC 1 /r Slope=w 1 /r Slope=w 2 /r C 2 C 1 C 3 C 1 : Original isocost curve (ie: \$200) C 2 : Isocost curve after Price change (ie: \$200) C 3 : Isocost curve after Price change (ie: \$300)
5 Q (units/yr) TC (\$/yr) TC(Q) old TC(Q) new Example: A Shift in the Total Cost Curve Q 0 300 200

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6 Let Q=2(LK) 1/2 MRTS=K/L, W=5, R=20, Q=40 What occurs to costs when rent falls to 5? K/L=5/20 Q=2(LK) 1/2 4K=L 40=2(4KK) 1/2 40=4K 10=K 40=L
7 Let Q=2(LK) 1/2 MRTS=K/L, W=5, R=20, Q=40 What occurs to costs when rent falls to 5? K/L=5/5 Q=2(LK) 1/2 L=K 40=2(LL) 1/2 40=2L 20=L 20=K

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8 What occurs when rent falls to 5?
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## This note was uploaded on 03/14/2009 for the course ECON ECON 281 taught by Professor Priemaza during the Fall '08 term at University of Alberta.

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Econ 281 Chapter8a - Chapter 8 Cost Curves In the long run...

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