PAM 200 Chapter 8

PAM 200 Chapter 8 - PAM 200 Chapter 8 At any input...

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PAM 200 Chapter 8 At any input combination firm on iscocost line corresponding to TC1 dollars total cost where TC 1 = wL 1 +rK 1 Long-run total cost curve- curve that shows how total cost varies with output, holding input prices fixed, and choosing all inputs to minimize cost Long-run total cost curve must be increasing Q and must equal 0 when Q=0 Increase in price of capital results in a new total cost curve that lies above the original total cost curve at every Q>0 A given percentage increase in both input prices leaves the cost-minimizing input combination unchanged while total cost curve shifts up by exactly same percentage Long-run average cost: firm’s total cost per unit of output. Equals long-run total cost divided by total quantity Q: AC(Q)=[TC(Q)]/Q taken from line from origin Long-run marginal cost: rate at which long-runt total cost changes with respect to change in output MC(Q) = ( TC)/( Q) and thus MC(Q) equals slope of TC(Q) MC(Q) intersects AC(Q) at AC(Q)’s lowest point Long run MC does not depend on Q and s slope of long-run total cost curve Whenever long-run total cost is straight line, long run AC and MC will be same and horizontal line o If average cost decreasing as quantity increasing average cost is greater than marginal cost: AC(Q) > MC(Q) o If average cost increasing as quantity increasing then average cost less than marginal cost: AC(Q) < MC(Q) o If average cost not increasing or decreasing as quantity increasing, then average cost equal to marginal cost: AC(Q) = MC(Q) Economies of scale: characteristic of production in which average cost decreases as output goes up
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This note was uploaded on 12/18/2008 for the course PAM 200 taught by Professor Unur during the Spring '08 term at Cornell.

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PAM 200 Chapter 8 - PAM 200 Chapter 8 At any input...

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