Varian_Chapter21_Cost_Curves

# Varian_Chapter21_Cost_Curves - Chapter Twenty-One Cost...

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Chapter Twenty-One Cost Curves

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Types of Cost Curves ± A total cost curve is the graph of a firm’s total cost function. ± A variable cost curve is the graph of a firm’s variable cost function. ± An average total cost curve is the graph of a firm’s average total cost function.
Types of Cost Curves ± An average variable cost curve is the graph of a firm’s average variable cost function. ± An average fixed cost curve is the graph of a firm’s average fixed cost function. ± A marginal cost curve is the graph of a firm’s marginal cost function.

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Types of Cost Curves ± How are these cost curves related to each other? ± How are a firm’s long-run and short- run cost curves related?
Fixed, Variable & Total Cost Functions ± F is the total cost to a firm of its short- run fixed inputs . F, the firm’s fixed cost , does not vary with the firm’s output level. ± c v (y) is the total cost to a firm of its variable inputs when producing y output units. c v (y) is the firm’s variable cost function. ± c v (y) depends upon the levels of the fixed inputs.

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Fixed, Variable & Total Cost Functions ± c(y) is the total cost of all inputs, fixed and variable , when producing y output units. c(y) is the firm’s total cost function; cy F c y v () . = +
y \$ F

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y \$ c v (y)
y \$ F c v (y)

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y \$ F c v (y) c(y) F cy F c y v () = +
Av. Fixed, Av. Variable & Av. Total Cost Curves ± The firm’s total cost function is For y > 0, the firm’s average total cost function is cy F c y v () . = + AC y F y y AFC y AVC y v . =+

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Av. Fixed, Av. Variable & Av. Total Cost Curves ± What does an average fixed cost curve look like? ± AFC(y) is a rectangular hyperbola so its graph looks like . .. AFC y F y () =
\$/output unit AFC(y) y 0 AFC(y) 0 as y → ∞

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Av. Fixed, Av. Variable & Av. Total Cost Curves ± In a short-run with a fixed amount of at least one input, the Law of Diminishing (Marginal) Returns must apply, causing the firm’s average variable cost of production to increase eventually.
\$/output unit AVC(y) y 0

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\$/output unit AFC(y) AVC(y) y 0
Av. Fixed, Av. Variable & Av. Total Cost Curves ± And ATC(y) = AFC(y) + AVC(y)

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\$/output unit AFC(y) AVC(y) ATC(y) y 0 ATC(y) = AFC(y) + AVC(y)
\$/output unit AFC(y) AVC(y) ATC(y) y 0 AFC(y) = ATC(y) - AVC(y) AFC

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\$/output unit AFC(y) AVC(y) ATC(y) y 0 Since AFC(y) 0 as y → ∞ , ATC(y) AVC(y) as y → ∞. AFC
\$/output unit AFC(y) AVC(y) ATC(y) y 0 Since AFC(y) 0 as y → ∞ , ATC(y) AVC(y) as y → ∞. And since short-run AVC(y) must eventually increase, ATC(y) must eventually increase in a short-run.

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Marginal Cost Function ± Marginal cost is the rate-of-change of variable production cost as the output level changes. That is, MC y cy y v () . =
Marginal Cost Function ± The firm’s total cost function is and the fixed cost F does not change with the output level y, so ± MC is the slope of both the variable cost and the total cost functions.

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## This note was uploaded on 07/28/2010 for the course ECON 301 taught by Professor Hansen during the Fall '08 term at University of Wisconsin.

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Varian_Chapter21_Cost_Curves - Chapter Twenty-One Cost...

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