econ111_lecture8

# econ111_lecture8 - Econ 111 Microeconomics Spring 2009...

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1 Econ 111 Microeconomics Spring 2009 Lecture 8 (Chapter 7: Cost (cont’)) Heiwai Tang

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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
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 =

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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 =
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?

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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.
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

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econ111_lecture8 - Econ 111 Microeconomics Spring 2009...

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