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Six per page_Week8 Part II_ECON2101_S1_2010

# Six per page_Week8 Part II_ECON2101_S1_2010 - Short-run...

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1 Costs 1. Cost Minimization (Ch 20) 2. Cost Curves (Ch 21) Short-run total costs ± The short-run cost-minimization problem is min x wx 1 0 11 22 + fx x y (, ) . 12 = ± Note x2 is fixed at x2 = x2’ WEEK 8 Part II ECON2101 S1 2010 2 Short run costs: an example ± Consider the Cobb Douglas case again: x x x f(x y 1/2 1/2 = = ± Let x2 be fixed at 4. . ) , 2 1 2 1 ± Substituting x2 = 4 above we get 1/2 1/2 1/2 2x 4 x y = = ± Rearranging this gives the short run 1 1 demand function for x1 y x 2 1 = WEEK 8 Part II ECON2101 S1 2010 3 4 Short run costs: an example ± The conditional demand function for x1 and the short run cost function are given by (a) d (b) ti l and (b) respectively (a) y 2 S 2 4 y) , w , (w x 2 1 1 = (b) 2 1 2 1 4 ) 4 ( ) , , ( w y w y w w c s + = WEEK 8 Part II ECON2101 S1 2010 4 Computing different costs ± Let w1 = 4 and w2 = 1/4. Then 1 2 + = = y c y w w s ± Fixed costs: c(0) = 1 ) ( ) , , ( 2 1 y c Fixed costs: c(0) 1 ± Average fixed costs:AFC(y) = c(0)/y = 1/y ± Variable costs: 2 y ± Average variable costs: AVC(y) = Variable cost/y = y ± Average costs: AC(y) = AVC + AFC = y + (1/y) WEEK 8 Part II ECON2101 S1 2010 5 ± Marginal costs: MC(y) = dc(y)/dy = 2y Diagram: AVC, AC, MC for the example WEEK 8 Part II

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Six per page_Week8 Part II_ECON2101_S1_2010 - Short-run...

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