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 doesnt 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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