Lecture09 - Lecture 09: Cost Curves Perlo Chapter 7...

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Lecture 09: Cost Curves Perlo/ Chapter 7 Vladimir Petkov VUW 29 March 2010 Vladimir Petkov (VUW) Lecture 09: Cost Curves 29 March 2010 1 ± 24
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Short Run Costs A ( F ) is the expense that cannot be adjusted in the short A variable cost ( VC ) is the expense that changes with the amount of output produced. Note: in the long run, all costs are variable. total cost ( C cost: C = VC + F . Vladimir Petkov (VUW) Lecture 09: Cost Curves 29 March 2010 2 / 24
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Short Run Costs: Cobb-Douglas Example f ( K , L ) = K α L 1 α . K = ¯ K . Therefore, the labor needed to produce ¯ q ¯ q = ¯ K α L 1 α . Solving for L yields L = ¯ q ¯ K α ± 1 1 α . Thus, the short-run total cost is C = wL + r ¯ K = w ¯ q ¯ K α ± 1 1 α + r ¯ K . r ¯ K and the variable cost is w ² ¯ q ¯ K α ³ 1 1 α . Vladimir Petkov (VUW) Lecture 09: Cost Curves 29 March 2010 3 / 24
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The Short Run Expansion Path The short-run decision about factor proportions is not done by the tangency optimization routine. uniquely determined by the target output level. Input prices are irrelevant for the short-run choice of L . L K K Vladimir Petkov (VUW) Lecture 09: Cost Curves 29 March 2010 4 / 24
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Obtaining The Short Run Cost Curve We can drop the isocost line and just map the cost of hiring labor. If MP L is diminishing, the graph is as follows: Vladimir Petkov (VUW) Lecture 09: Cost Curves 29 March 2010 5 / 24
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Cost Measures Marginal Cost MC ) is the amount by which MC = dC ( q ) dq . Remember that
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Lecture09 - Lecture 09: Cost Curves Perlo Chapter 7...

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