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_Lecture_10

# _Lecture_10 - Lecture 10 1-minute review...

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Unformatted text preview: Lecture 10 1-minute review Profit-Maximization by competitive firm • compute cost function • profit = revenue - cost • solve • be careful about whether critical point = maximum 1 Costs • total cost C ( q ) • marginal cost MC ( q ) = C ( q ) • average cost AC ( q ) = C ( q ) /q • Short Run Cost SC ( q ) – hold capital constant – easy to adjust labor input quickly – hard to adjust capital investment quickly – adjusting capital investment is like adjusting capacity 2 Example: Cobb-Douglas f ( k,` ) = k 1 / 2 ` 1 / 4 p k = 20 ,p ` = 10 ,p = 100 We found • optimal mix of inputs is k = ` = q 4 / 3 • long run cost C ( q ) = 30 q 4 / 3 3 Short run? Long run plan q = 1000, k = ` = 10 , 000 Suddenly adjust to increased short-run demand? • produce using k = 10 , 000 • adjust ` to achieve desired output 4 q = (10 , 000) 1 / 2 ` 1 / 4 ` 1 / 4 = q/ 100 ` = ( q/ 100) 4 SC ( q ) = 20 k + 10 ` = (20)(10 , 000) + 10 q 100 4 5 Compare long-run costs and short-run costs •...
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_Lecture_10 - Lecture 10 1-minute review...

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