Class 8-2010 - 10/3/2010 Managerial Econ: Class 8 Oct. 4...

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10/3/2010 1 THE UNIVERSITY OF BRITISH COLUMBIA Managerial Econ: Class 8 – Oct. 4 Organization of the Firm 1. Cost Questions 2. Economies of Scale 3. The Learning Curve 4. Ownership and Governance of Firms 5. Profit Maximization 6. Owners’ and Managers’ Objectives 7. The Agency Problem 8. Summary THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 1 In order to minimize the cost of producing a particular output level a firm must a. Operate at the minimum point on the MC curve. b. Operate at the minimum point on the AC curve. c. Operate where the marginal product per dollar is the same for all factors used. d. Operate where MC is less than or equal to AC. e. None of the above.
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10/3/2010 2 THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 2 We observe that demand for MBA programs normally rises during recessions (i.e. more students want to enrol). This fact probably reflects a. The importance of ignoring sunk costs. b. The importance of opportunity costs. c. U-shaped average cost for MBA programs. d. All of the above. e. None of the above. THE UNIVERSITY OF BRITISH COLUMBIA 2. Economies of Scale A cost functions has economies of scale if average cost falls as output rises. A cost function has constant costs if average cost is constant as output rises. A cost function has diseconomies of scale if average cost is rising at output rises. Economies of scale are normally caused by increasing returns to scale. Note that economies of scale is a cost concept; increasing returns to scale is a production concept. They are related but they are not the same thing. 2 of 4
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10/3/2010 3 THE UNIVERSITY OF BRITISH COLUMBIA 3. The Learning Curve The Learning Curve is the relationship between average cost and cumulative output. If learning is important then average cost falls as experience increases. The learning curve would be downward sloping. The learning curve is NOT the same thing as economies of scale. Economies of scale tell us how average cost changes THIS PERIOD if we produce more. The learning curve tells us how the position of the average cost curve this period depends on cumulative output (i.e. on experience).
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This note was uploaded on 01/19/2011 for the course COMMERCE 290 taught by Professor Brianogram during the Spring '09 term at The University of British Columbia.

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Class 8-2010 - 10/3/2010 Managerial Econ: Class 8 Oct. 4...

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