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Unformatted text preview: Department of Economics University of California, Berkeley ECON 100A Spring 2010- Section 9 GSI: Antonio Rosato Cost of Production Economic costs of production are divided into two components: 1. Fixed costs ( FC ) – do not vary with the amount of output produced. 2. Variable cost ( V C ) – increases as the amount of output increases. A change in the variable cost as output increases enables us to measure the marginal cost ( MC ), as the increment in variable cost from producing another unit of output, or MC = Δ V C/ Δ q . The sum of the two types of costs for any level of production is the total cost ( TC ). The average total cost ( ATC ) is obtained by dividing TC by q , the level of output. ATC can be decomposed into average fixed cost ( AFC ) and average variable cost ( AV C ). The MC that we defined above can also be measured as the increment in TC from producing another unit of output, or MC = Δ TC/ Δ q = Δ V C/ Δ q . How do these costs relate to our discussion of production technology? In the short run, when at least one input is fixed, the costs of production will vary with the change in the variable input. Let’s assume that the variable input is labor, and the firm can hire any number of workers at an hourly wage of w dollars. The fixed input is capital, and the firm already paid for it at the beginning of the month.and the firm already paid for it at the beginning of the month....
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This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.
- Spring '08