Micro.Week6.2007 - 6/1 NOW we go to the next stage we want to link production to costs TC = PKK PLL PKK = cost of capital PLL = cost of labour In

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6/1 NOW we go to the next stage: we want to link production to costs TC = P K K + P L L P K K = cost of capital P L L = cost of labour In short run, K fixed and L variable, so P K K = fixed cost P L L = variable cost TC = P K K + P L L = FC + VC Now divide both sides by q TC == FC + VC q q q AC == AFC + AVC MC = dTC/dq
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6/2 eg q = (KL) 0.5 Suppose K = 100 q = 10L 0.5 L 0 1 2 3 4 9 16 25 36 49 64 q 0 10 14.1 17.3 20 30 40 50 60 70 80 Take part of this table L 0 1 4 9 16 25 36 49 64 q 0 10 20 30 40 50 60 70 80 Now suppose price of capital = $4, price of labour = $25 We can create a table of q, FC, VC, TC, AC, AVC, AFC, MC q FC VC TC AC AVC AFC MC 0 10 20 30 40 50 60 70 80
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6/3 It turns out there is an interesting relationship between MC and MP L MC = dTC/dq = d(P L L)/dq = P L dL/dq = P L /MP L eg. q = 10L .5 L .5 = 0.1q MP L = 5L -.5 price of labour = 25 MC = P L /MP L = 25/5L -.5 = 5L .5 = .5q Hence, if MP is falling, then MC will be rising
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6/4 Now, from here on in, we will ignore the origin of the TC/AC/MC etc., and simply work with them Typical graph of AC, AVC, MC
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6/5 eg TC = 400 + 5q + q 2 FC = 300 VC = 1. Find minimum of AC, AVC
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6/6 Check value of MC at min AC and AVC Graph:
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This note was uploaded on 06/13/2011 for the course ECON A04 taught by Professor Mk during the Spring '07 term at University of Toronto- Toronto.

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Micro.Week6.2007 - 6/1 NOW we go to the next stage we want to link production to costs TC = PKK PLL PKK = cost of capital PLL = cost of labour In

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