Chapter 20

# Chapter 20 - Average Costs function: AC(y) = c(w1, w2, y) /...

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Chapter 20: Cost Minimization 20.1 Cost Minimization (x1,x2) min w1x1 + w2x2 such that f(x1,x2) = y C(w1, w2, y) is the  cost function W1x1+w2x2 = C Or x2 = c/w2 – (w1/w2) (x1) Slope of –w1/w2  and vertical intercept of C/w2 ; let C vary, you get different isocost lines FIND point on isoquant that has lowest possible iscocost line  Technical rate of substitution must equal the factor price ratio: - MP1(x1*,x2*) = TRS(x1*,x2*) = -  w1             MP2(x1*,x2*)  w2 W1∆x1 + w2∆x2 = 0 Prefect Substitutes: c(w1, w2, y) = min {w1y, w2 y} = min {w1, w2} y Cobb Douglas: (pg 357)  20.2 Revealed Cost Minimization ∆w1∆x1 + ∆w2∆x2 < = 0 20.3 Returns to Scale and the Cost Function

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Unformatted text preview: Average Costs function: AC(y) = c(w1, w2, y) / y C(w1,w2, y) = c(w1, w2, 1)y if it returns to scale constatnt 20.4 Long Run and Short Run Costs Short run cost function: c(s)(y,x2) = (x1) min w1, x1 + w2x2 Short run factor demands: X1 =x1s(w1,w2,x2,y) X2= x2 Long run cost function: c(y) = (x1,x2) min w1x1+ w2x2 X1 = (w1,w2,y) X2 = 9w1, w2, y) C(y) = w1x1(w1,w2,y) + w2x2(w1,w2,y) X1 = x1 (y) X2 = x2 (y) C(y) = cs (y, x2, (y)) The cost minimizing amount of the variable factor in the long run is that amount that the firm would choose in the short run 20.5 Fixed and Quasi-Fixed Costs 20.6 Sunk Costs...
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## Chapter 20 - Average Costs function: AC(y) = c(w1, w2, y) /...

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