Chapter 21 Cost Curves

Chapter 21 Cost Curves - g MC passes through minimum of AVC...

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Chapter 21 Cost Curves Cost curve : Depicts graphically the cost function of a firm. 21.1) Average costs a) Total costs of the firm: c(y)=c v (y)+F where F is the sum of fixed costs, c v (y) the sum of variable costs). b) Average cost function : Cost per unit of output. c) Average variable cost function : Variable costs per unit of output. d) Average fixed cost function : fixed costs per unit output. e) AC(y)=AVC(y)+AFC(y) f) Graphs 21.2) Marginal Costs a) Marginal cost curve : Change in costs for a given change in output. b) = + - ( ) = + - ( ) MCy cy ∆y c y ∆y cvy ∆y cv y ∆y c) Marginal cost for the first small unit of amount equals the average variable cost for a single unit of output. d) AVC curve can initially slope down but doesn’t need to. It will eventually rise as long as there are fixed factors that constrain production. e) AC curve will initially fall due to declining fixed costs but then rises due to increasing AVC.
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f) MC and AVC are the same first unit of output.
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Unformatted text preview: g) MC passes through minimum of AVC and AC. Reasoning: if AVC are rising, then MC must be above AVC, and if AVC are decreasing, MC must be below AVC. h) GRAPHS i) j) k) 21.3) Marginal Costs and Variable Costs a) Area under marginal cost curves gives the variable costs. b) Graph: c) 21.4) Long-run Costs a) In the long run, there are no fixed costs so the AC curve doesn’t have to be U-shaped. b) Short run AC curve must be tangent to long run AC cost: c) d) e) f) g) Lower envelope : See picture below h) i) j) 21.5) Discrete Levels of Plant Size a) Each different level of output has a unique optimal plant size associated with it. b) You can construct long run AC curve by taking the lower boundaries of the short run AC curve: c) d) 21.6) Long Run Marginal Costs a) Long run marginal costs consists of various segments of the short run marginal cost curves. b) Graph: c) d) e)...
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Chapter 21 Cost Curves - g MC passes through minimum of AVC...

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