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ECON100A_13

# ECON100A_13 - Review Short Run Cost 1 Question1 The wage is...

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1/4/2008 1 Review Short Run Cost

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1/4/2008 2 Question 1 The wage is \$2/hr and rental rate on capital is \$1/hr. Based on the figure on the right, what is the short run total cost of producing 24 units of output in the short-run, given 7 units fixed capital? L K Q=20 Q=24 7 2 4 6 10
1/4/2008 3 Question 2 Holding constant w, r and K, SAFC(Q,w,r,K): A. Always rise as Q rises B. Always falls as Q rises C. Always stay the same as Q rises D. Could either rise or fall as Q rises

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1/4/2008 4 Question 3 What does the RED curve depict? A. STC B. SVC C. SATC D. SMC E. SAVC Q \$/unit
1/4/2008 5 Theory of Cost Long Run

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1/4/2008 6 Time Horizon Very short short long run run run L, K K fixed L, K fixed L variable variable
1/4/2008 7 Isocost Line Definition: Set of input bundles that cost the same, given w and r. Say total cost is TC 0 . If use only labor then wL 0 = TC 0 → L 0 = TC 0 / w If use only capital then rK 0 = TC 0 → K 0 = TC 0 / r L K TC 0 /r TC 0 /w

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1/4/2008 8 Question What is slope of an isocost line? A. TC 0 /w B. TC 0 /r C. r/w D. w/r L K TC 0 /r TC 0 /w
1/4/2008 9 Every input bundle costs something…. So There are many isocost lines…. Isocost Lines Cover the Plane Graphically: L K TC 4 TC 3 TC 2 TC 1 TC 5

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1/4/2008 10 How to produce Q units of output at minimum cost Min wL+rK s.t F(L,K)= Want to MINIMIZE cost Want to be on LOWEST isocost line The Cost Minimization Problem Graphically: L K F(L,K)= Q Q
1/4/2008 11 Tangency Condition: L*, K* satisfy slope of isoquant= slope of isocost line MRTS(L*,K*)=w/r Also must satisfy constraint: F(L, K)= The Cost Minimization Problem Graphically: L K F(L,K)= Q Q L* K*

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ECON100A_13 - Review Short Run Cost 1 Question1 The wage is...

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