econ111_lecture8 - Econ 111 Microeconomics Spring 2009...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Econ 111 Microeconomics Spring 2009 Lecture 8 (Chapter 7: Cost (cont’)) Heiwai Tang
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Agenda Long run cost minimization Example on solving for short run and long run cost functions Economies of scale and costs Economies of scope and costs Learning curve and costs
Background image of page 2
3 Long Run Cost Minimization How does the isocost line relate to the firm’s production function? K L MP MP / / - MRTS = Δ Δ Δ Δ = Δ Δ = K q L q L K r w L K = Δ Δ = line isocost of Slope cost minimizes firm when r w MP MP K L =
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 Long Run Cost Minimization (cont’) The minimum cost combination can then be written as: Minimum cost for a given output will occur when each dollar of input added to the production process will add an equivalent amount of output . r w K L MP MP =
Background image of page 4
5 Input Substitution When an Input Price Changes If the price of labor (or capital) changes, then the slope of the isocost line changes, -(w/r) It now takes a new combination of labor and capital to produce the same level of output Suppose wages increase relative to the rental cost of capital. What would happen?
Background image of page 5

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

View Full DocumentRight Arrow Icon
6 Input Substitution When an Input Price Change C 2 Combination B is used in place of combination A to produce the same level of output. K 2 L 2 B C 1 K 1 L 1 A Q 1 If the wage rate rises, the isocost curve becomes steeper due to the change in the slope - (w/r). Labor per year Capital per year Like pure substitution effect in consumer theory.
Background image of page 6
Isoquants and Input Substitution If two inputs are perfect substitutes (linear isoquant), then small price changes cause major shifts in input choices. If two inputs are perfect complements (right
Background image of page 7

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

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 21

econ111_lecture8 - Econ 111 Microeconomics Spring 2009...

This preview shows document pages 1 - 8. Sign up to view the full document.

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