# ch06-me - (14-16(200(6 12(200 =-\$1,600 6.2 COST ANALYSIS MC...

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COST ANALYSIS Chapter 6 slide 1 General Principles: - Only Differential Costs Matter. Ignore Costs that are fixed across Options. Examples MBA Degree City-Owned Land Surplus Factory Space Starting a Business Cost of Capital \$100 K at 15% Revenues \$200 K Expenses -\$110 K Your Wage -\$65 K -\$15 K Economic Profit \$10 K - Opportunity Costs Should Not be Ignored.

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ORDERING A BEST SELLER Demand: P = 24 - Q MC = \$12 per book A. Find optimal Q and P . MR = 24 - 2Q = 12 Q = 6 hundred, P = \$18 Cont. = (18 - 12)(600) = \$3,600 . B. Suppose average book earns \$4 and shelf space is limited . MC = 12 + 4 (Opp Cost) Q = 4 hundred, P = \$20. Cont. = (20 - 16)(400) = \$1,600. C. Suppose demand falls to P = 18 - 2Q. How many of the 400 books should the store sell and how many should it return for \$6 each? MC = 4 + 6 (Opp Cost) MR = 18 - 4Q = 10, Q = 2 hundred, P = \$14. Cont. =

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Unformatted text preview: (14 -16)(200) + (6 - 12)(200) = -\$1,600. 6.2 COST ANALYSIS MC Short-Run Cost Behavior Diminishing Marginal Productivity leads to Increasing MC. Example: MC = Wage/MP L W = \$12/Hr, MP L = 4/Hr then MC = \$3/unit AC 6.3 LONG-RUN COST 6.4 The shape of LR average cost depends upon returns to scale. Constant LAC reflects Constant Returns to Scale. SAC 1 SAC 2 SAC 3 Flat LAC reflects Constant Returns to Scale. With plant fixed, SAC is U-shaped and lies above LAC. OPTIMAL OUTPUT MC Q* P* Demand MR MR Q* Low Demand versus High Demand AC 6.5 In either case, the firm’s Optimal output occurs where: MR = MC THE SHUT-DOWN RULE MC P* Demand MR 1. In the long run, the firm should shut down when: P < AC . AVC 6.6 AC 2. In the short run, the firm should produce Q* because: P > AVC . Q*...
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ch06-me - (14-16(200(6 12(200 =-\$1,600 6.2 COST ANALYSIS MC...

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