13-Costs in LR - The Cost of Production Costs in the Long...

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1 The Cost of Production: Costs in the Long Run Reading: Chapter 7
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2 Cost in the Long Run All inputs can be adjusted to minimize the cost If capital and other inputs can be varied, no fixed costs in the LR ( FC = 0) Then LR total cost = LR variable cost: TC = VC Input choice: from all technologically efficient combinations of inputs, choose the economically efficient combination of inputs Combination of L and K that minimizes the cost
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3 The Isocost Line w = wage rate r = rental rate or the user cost of K Total cost of production: C = wL + rK Isocost line shows all combinations of L and K that can be purchased for a given cost Slope of the isocost shows the rate at which capital can be substituted for labor with no change in cost: ( 29 r w L K - =
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4 Choosing the Optimal Mix of Inputs Firm determines the best combination of inputs by either Cost minimizing : what is the lowest cost at which the firm can produce given output q ? Output maximizing : What is the most output that can be produced at a given cost C ? Duality: these two problems have the same unique solution
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5 Producing a Given Output at Minimum Cost Labor per year Capital per year Isocost C 2 shows quantity Q 1 can be produced with combination K2,L2 or K3,L3. However, both of these are higher cost combinations than K1,L1. Q 1 Q 1 is an isoquant for output Q 1.
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