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Unformatted text preview: Aniko Oery University of California, Berkeley Section 9: Cost minimization and returns to scale Econ 100A, MICRO-ECONOMIC ANALYSIS, Spring 2010 As a first step of solving the profit-maximization problem of the firm, the firm needs to find the cheapest input combination to produce a specific output goal. Therefore, it solves the cost- minimization problem min L,K C ( L, K ) subject to f ( L, K ) = Q for a output goal Q , where f ( L, K ) is the production function we introduced last time. The solution to this problem will depend on the value of Q and it will give us the cost function C ( Q ). In this discussion section we will review how to solve the cost minimization problem. We will also briefly talk about retruns to scale. 1 The cost minimization problem Note first that the cost that the firm faces is given by C ( L, K ) = wL + rK where w is the price for input L and r is the price for input K . The level curves of this cost function are called iso-cost lines and describe input combinations that result in the same cost.and describe input combinations that result in the same cost....
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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 Berkeley.
- Spring '08