Microeconomics 27 Monday, November 6, 2006

# Microeconomics 27 Monday, November 6, 2006 - Q TPL TC TC ==...

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Monday, November 06, 2006 Microeconomics CONTINUING THE SWEATER EXAMPLE Suppose the firm rents the machine for \$25 a day Suppose the firm pays each worker \$25 per day # of workers Q Cost of Machine Cost of Workers Total Cost 0 0 \$25 0 \$25 1 4 \$25 \$25 \$50 2 10 \$25 \$50 \$75 3 13 \$25 \$75 \$100 4 15 \$25 \$100 \$125 5 16 \$25 \$125 \$150 TC 150 TC 125 100 75 TC is increasing function of output 50 25 2 4 6 8 10 12 14 16 Q TC si an increasing function of output Initially, TC increasing at a decreasing rate because MPL is falling and the production of 1 additional sweater requires a smaller and smaller amount of additional labor. Hence, TC increasing but at a decreasing rate. After point of diminishing returns it is vise versa. The TC curve is shaped the way it is because of Diminishing returns

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Unformatted text preview: Q TPL TC TC == L Q Monday, November 06, 2006 OR Q TPL TC TC == L Q • Mankiu page 279 discusses production and costs under eh assumptions we make in class (FC) FIXED COST – A cost that doesn’t change as output varies (VC) VARIABLE COST – A cost that does change with output AVERAGE FIXED COST (AFC) = FC/Q fixed cost per unit of output AVERAGE VARIABLE COST (AVC) = VC/Q variable cost per unit of output AVERAGE TOTAL COST = TC/Q = AVC +AFC total cost per unit of output = VC/Q + FC/Q (MC) MARGINAL COST – The increase in TC that arises from producing one more unit of output MC = ∆ TC/∆Q = slope of the TC curve \$ TC VC FC Q • Vertical distance between TC and VC = FC...
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Microeconomics 27 Monday, November 6, 2006 - Q TPL TC TC ==...

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