Chapter 7 - Section 7.2 Short Run Costs TC = FC + VC AC =...

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Section 7.2 Short Run Costs TC = FC + VC AC = TC/q AVC = VC/ q AFC = FC/q MC = dTC /dq Observations worth noting: MC = w/ MP L So, MC starts to rise once MP L starts to diminish Example : Ch. 7, exercise 2, page 261
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a) Fill in the table Units of Output Total Cost Fixed Cost Variable Cost Average Fixed Cost Average Variable Cost Average Total Cost 0 100 1 125 2 145 3 157 19 4 177 5 202 6 236 7 270 38.6 8 326 9 398 10 490 b) What’s the marginal cost of the 10 th unit of output? Example : Ch. 7, exercise 8, page 262 Given q = 5KL, r = 10,000, w = 2,000 In the short run, K is fixed at K = 5. Find equations for TC, AC and MC: Looking at the previous example, a more complex cost function is necessary to get a U-shaped AC curve and rising MC.
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Example : Ch. 7 Problem Set, problem 9 Consider C = Q 3 - 100Q 2 + 3000Q (a cubic cost function) Find equations for AC and MC. Section 7.3 Long Run Costs Recall, Inputs L, K both variable P L = w wage rate P K = r rental rate Cost of any (L,K) combination: C = w L + r K Isocost Line : All (L,K) combinations s.t. w L + r K = C 0 Recall, Isoquant …. All (L,K) combinations s.t. q = f(L,K) = q 0
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Cost Minimization: Find (L * ,K * ) such that ……. Tangency Condition:
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Chapter 7 - Section 7.2 Short Run Costs TC = FC + VC AC =...

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