Econ 13 - 1 Short-Run Cost Function 1 14.01 Principles of...

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Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Short-Run Cost Function 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 15, 2007 Lecture 13 Cost Functions Outline 1. Chap 7: Short-Run Cost Function 2. Chap 7: Long-Run Cost Function Cost Function Let w be the cost per unit of labor and r be the cost per unit of capital. With the input Labor ( L ) and Capital ( K ), the production cost is w × L + r × K. A cost function C ( q ) is a function of q , which tells us what the minimum cost is for producing q units of output. We can also split total cost into ±xed cost and variable cost as follows: C ( q ) = FC + V C ( q ) . Fixed cost is independent of quantity, while variable cost is dependent on quan- tity. 1 Short-Run Cost Function In the short-run, ±rms cannot change capital, that is to say, r × K = const . Recall the production function given ±xed capital level K in the short run (refer to Lecture 11) (see Figure 1). Suppose w = 1, the variable cost curve can be derived from Figure 1. Adding r × K to the variable cost, we obtain the total cost curve (see Figure 2). Average total cost is TC FC + V C rK wL ( q ; K ) ATC = = = + . q q q q With the de±nition of the average product of labor: q AP L = , L
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Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
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This note was uploaded on 04/26/2009 for the course ECON MICRO taught by Professor Chen during the Spring '09 term at MIT.

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Econ 13 - 1 Short-Run Cost Function 1 14.01 Principles of...

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