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Unformatted text preview: November 9, 2009 Reading: Ch. 5, pp. 177-185 Return HWs #9,#10 Problem Set #11. Posted Test #2 Wednesday Lecture 31 REVIEW___________________________________________________: b. The supply curve for the firm 1. Determination of Profits and Losses. 2. The Shutdown point and the supply function for the firm. 3. The Breakeven Point PREVIEW ____________________________________________________ c. Algebraic Forms of the Cost Function. 1. Solving Algebraic specifications 2. Production and pricing decisions d. Sunk costs vs. Variable Costs 3. Long Run Costs a. Long run average costs b. Economies of Scale, Diseconomies of Scale and Survivability c. Measuring returns to scale Lecture__________________________________________________________ c. Algebraic Forms of the Cost Function . The appropriate specification of the cost function depends on the underlying cost relationships. However, a cubic cost function is often used, because it is sufficiently general to allow any relationship. If C(Q) = f + aQ + bQ 2 + cQ 3 (where b<0) Notice that fixed costs are f. Marginal costs are the derivative of C(Q), or C(Q) = a + 2bQ + 3cQ 2 Notice that other cost relations are easily derived. For instance, average variable costs are AVC = a + bQ + cQ 2 To minimize AVC, set AVC to MC AVC MC a + bQ + cQ 2 = a + 2bQ + 3cQ 2-bQ = 2cQ 2 Q =-b/2c (recall b<0)...
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- Fall '08