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# Ch8-Slides - Chapter Eight Costs Curves Chapter Eight...

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Costs Curves Chapter Eight Chapter Eight

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Chapter Eight Overview 1. Introduction: HiSense 2. Long Run Cost Functions •S h i f t s Long run average and marginal cost functions Economies of scale 3. Short Run Cost Functions 4. The Relationship Between Long Run and Short Run Cost Functions 5. Economics of Scope 1. Introduction: HiSense 2. Long Run Cost Functions h i f t s Long run average and marginal cost functions Economies of scale 3. Short Run Cost Functions 4. The Relationship Between Long Run and Short Run Cost Functions 5. Economics of Scope Chapter Eight
HiSense HiSense HiSense is China’s largest producer of electronic products. It started with producing TVs. In mid-1990s, its TV sales increased by 50% annually. In 2000s, it began to produce PC, mobile phones, refrigerators, and air conditioners. The CEO of Hisense needs to know how its average cost will change as the volume of production increases. How input prices will affect its production cost?

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Chapter Eight Long Run Cost Functions Definition: The long run total cost function relates minimized total cost to output, Q, to the factor prices (w and r). TC(Q,w,r) = wL*(Q,w,r) + rK*(Q,w,r) Where: L* and K* are the long run input demand functions
Chapter Eight What is the long run total cost function for production function Q = 50L 1/2 K 1/2 ? L*(Q,w,r) = (Q/50)(r/w) 1/2 K*(Q,w,r) = (Q/50)(w/r) 1/2 TC(Q,w,r) = w[(Q/50)(r/w) 1/2 ]+r[(Q/50)(w/r) 1/2 ] = (Q/50)(wr) 1/2 + (Q/50)(wr) 1/2 = (Q/25)(wr) 1/2 What is the graph of the total cost curve when w = 25 and r = 100? TC(Q) = 2Q Long Run Cost Functions

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Q (units per year) TC (\$ per year) TC(Q) = 2Q \$4M. Chapter Eight A Total Cost Curve
1 M. \$2M. Chapter Eight TC (\$ per year) Q (units per year) TC(Q) = 2Q A Total Cost Curve

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1 M. 2 M. \$2M. \$4M. Chapter Eight A Total Cost Curve TC (\$ per year) Q (units per year) TC(Q) = 2Q
Chapter Eight Long Run Total Cost Curve Definition: The long run total cost curve shows minimized total cost as output varies, holding input prices constant. Graphically, what does the total cost curve look like if Q varies and w and r are fixed? Definition: The long run total cost curve shows minimized total cost as output varies, holding input prices constant. Graphically, what does the total cost curve look like if Q varies and w and r are fixed?

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Chapter Eight Long Run Total Cost Curve
Chapter Eight Long Run Total Cost Curve

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Chapter Eight Long Run Total Cost Curve
Q (units per year) L (labor services per year) K TC (\$/yr) 0 0 L 0 L 1 K 0 K 1 Q 0 Q 1 TC = TC 1 TC = TC 0 Chapter Eight Long Run Total Cost Curve

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Q (units per year) L (labor services per year) K TC (\$/yr) 0 0 LR Total Cost Curve Q 0 TC 0 =wL 0 +rK 0 L 0 L 1 K 0 K 1 Q 0 Q 1 TC = TC 1 TC = TC 0 Chapter Eight Long Run Total Cost Curve
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 Chapter Eight Long Run Total Cost Curve

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Chapter Eight Long Run Total Cost Curve Graphically, how does the total cost curve shift if wages rise but the price of capital remains fixed?
L K 0 TC 0 /r Chapter Eight A Change in Input Prices

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L 0 -w 0 /r TC 0 /r TC 1 /r -w 1 /r Chapter Eight K A Change in Input Prices
L 0 A B -w 0 /r TC 0 /r -w 1 /r Chapter Eight TC 1 /r K A Change in Input Prices

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L Q 0 0 A -w 0 /r TC 0 /r -w 1 /r Chapter Eight B TC 1 /r K A Change in Input Prices
Q (units/yr) TC (\$/yr) TC(Q) post Chapter Eight A Shift in the Total Cost Curve

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Q (units/yr) TC(Q) ante TC(Q) post Chapter Eight TC (\$/yr) A Shift in the Total Cost Curve
Q (units/yr) TC(Q) ante TC(Q) post TC 0 Chapter Eight TC (\$/yr) A Shift in the Total Cost Curve

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Q (units/yr) TC(Q) ante TC(Q) post Q 0 TC 1 TC 0 Chapter Eight TC (\$/yr) A Shift in the Total Cost Curve
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## This note was uploaded on 07/17/2008 for the course ECON 501.02 taught by Professor Yang during the Winter '08 term at Ohio State.

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Ch8-Slides - Chapter Eight Costs Curves Chapter Eight...

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