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lect09Firm2

# lect09Firm2 - 94 Once the firm's optimal input choices and...

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94 Once the firm’s optimal input choices and expansion paths are determined, we can find the firm’s cost functions. Each optimal input combination on the firm’s expansion path can also be viewed as a point on the firm’s total cost curve. Long Run Expansion Path Consider Y=X 1 .5 X 2 .5 , when W 1 =2 and W 2 =8. Find the cost of producing 50, 100 and 200 units of output. Show what happens to the cost function if W 1 increases to 8. Total Cost Function X 1 X 2 Y \$ Long Run Total Cost Function

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95 Long Run Expansion Path Consider Y=X 1 .5 X 2 .25 , when W 1 =2 and W 2 =4. Find the cost of producing 8, 27 and 64 units of output Total Cost Function X 1 X 2 Y \$ Long Run Total Cost Function
96 Marginal Cost is the additional cost incurred by producing one more unit of output = dTC/dY Integral of MC is VC. The area under the MC curve is total variable cost. Fixed Cost is the constant of integration. Average Total Cost is the cost per unit of output = TC/Y Examples: If TC = 4Y, MC = 4 If TC = 4Y 4/3 , then MC = (16/3)Y 1/3 If TC = 4Y, AC = 4 If TC = 4Y 4/3 , then MC = 4Y 1/3 Now consider a Long Run Total cost Curve that is more accurate or realistic than the ones we have derived above. Average cost falls initially as Y increases, then rises as Y increases.

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