Chapter 7

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

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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
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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...
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