Lecture_16_Cost_Minimization

Lecture_16_Cost_Minimization - Lecture 16: Cost...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 16: Cost Minimization. c 2008 Je/rey A. Miron Outline 1. Introduction 2. Cost Minimization 3. Returns to Scale and the Cost Function 4. Long-Run and Short-Run Costs 5. Fixed, Quasi-Fixed, and Sunk Costs 1 Introduction inputs to minimize the costs of producing a given level of output, again taking inputs prices as given (the output price is irrelevant). Cost-minimization is important for two reasons. First, in many instances economic entities do not necessarily want to maximize as universities, charities, some hospitals, and so on, are standard examples. Harvard to promote other objectives such as learning, truth, and so on. Harvard still should want to minimize its costs, however, given the objectives that it pursues, because reducing costs leaves more revenue to promote these objectives. maximization solution must also minimize costs. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Why? Assume not. That is, consider a set of choices for the inputs and outputs chosen level of output. Then, consider holding output constant, but changing the mix of inputs so that place. be minimizing costs. And, in many contexts, we gain substantial insight into the We therefore spend a couple of lectures characterizing the cost-minization prob- lem and related issues. 2 Cost Minimization x 1 and x 2 , to one output, y . a given level of output. Then the problem to be solved is min f x 1 ;x 2 g w 1 x 1 + w 2 x 2 subject to f ( x 1 ; x 2 ) = y: This is a problem of minimization subject to a constraint. It is therefore more start with a graphical presentation and then discuss several variations on a calculus approach. (NB: the fact that this is a minimization rather than a maximization is not the reason for the added di¢ culty; that di/erence simply changes the sign of the appropriate second-order condition.) So, consider the following graph: 2
Background image of page 2
Graph: Solution to the Cost-Minimization Problem 4 = x 1 = 2 y 1 = 2 y = 8 x 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/16/2009 for the course ECONOMICS 1010A taught by Professor Jeffreya.miron during the Fall '09 term at Harvard.

Page1 / 12

Lecture_16_Cost_Minimization - Lecture 16: Cost...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online