Chapter 7

# Chapter 7 - a TC = wL rK mM b K is fixed input c MP L/MP M...

This preview shows page 1. Sign up to view the full content.

Kimberly Zhang Chapter 7 Opportunity cost: the value of the next best alternative that is forgone when another alternativ is chosen Sunk costs: costs that have already been incurred and cannot be recovered Unsunk costs: costs that are incurred only if a particular decision is made Long run: period of time that is long enough for the firm to vary the quantities of all of its inputs as much as it desires a. TC = wL + rK b. w = wage rate, r = price per unit of capital services c. Slope of isoquant = slope of isocost line = -w/r = -MRTS L,K = -MP L /MP K Long-run corner solution a. Example: if MP L /w > MP K / r, the firm will substitute labor for capital until it uses no more capital b. Optimal input combination involves K = 0 Isocost line: the set of combinations of labor and capital that yield the same total cost for the firm Short run: period of time in which at least one of the firm’s input quantities cannot be changed
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: a. TC = wL + rK + mM b. K is fixed input c. MP L /MP M = w/m • A change in the relative price of inputs changes the slope of the isocost line. a. All else equal, an increase in w must decrease the cost minimizing quantity of labor and increase the cost minimizing quantity of capital with diminishing MRTS L,K . b. All else equal, an increase in r must decrease the cost minimizing quantity of capital and increase the cost minimizing quantity of labor. • Expansion path: traced by cost minimizing input combinations as Q varies • L, K are normal inputs if cost minimizing quantities of L and K rise as output rises • Input is inferior if cost minimizing quantity of input decreases as firm produces more output • Expansion path: stick everything in terms of K, L, w, r...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online