ch07 - Chapter 7 Costs and Cost Minimizatio n 1 Chapter...

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1 Costs and Cost Minimizatio n Chapter 7
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2 Chapter Seven Overview 1. What are Costs? 2. Long Run Cost Minimization The constraint minimization problem Comparative statics Input demands 1. Short Run Cost Minimization Chapter Seven
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3 Explicit Costs Costs that involve a direct monetary outlay. Chapter Seven Explicit Costs and Implicit Costs Implicit Costs Costs that do not involve outlays of cash.
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4 The relevant concept of cost is opportunity cost : the value of a resource in its best alternative use. The only alternative we consider is the best alternative Chapter Seven Opportunity Cost
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5 Economic Costs Sum of a firm’s explicit costs and implicit Costs. Chapter Seven Economic Costs and Accounting Costs Accounting Costs – Total of a firm’s explicit costs.
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6 Sunk Costs are costs that must be incurred no matter what the decision. These costs are not part of opportunity costs. Chapter Seven Sunk Costs It costs $5M to build and has no alternative uses $5M is not sunk cost for the decision of whether or not to build the factory $5M is sunk cost for the decision of whether to operate or shut down the factory Non-Sunk Costs are costs that must be incurred only if a particular decision is made.
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7 Chapter Seven Cost Minimization Cost minimization problem : Finding the input combination that minimizes a firm’s total cost of producing a particular level of output. Cost minimization firm : A firm that seeks to minimize the cost of producing a given amount of output. Long run : A period of time when the quantities of all of the firm’s input can vary. Short run : A period of time when at least one of its inputs’ quantities is fixed.
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8 Chapter Seven Long-Run Cost Minimization Minimize the firm’s costs, subject to a firm producing a given amount of output. Cost to the Firm : TC = Total Cost w = wage rate L = Quantity of Labor r = price per unit of capital services K = Quantity of Capital rK wL TC + =
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The set of combinations of labor and capital that yield the same total cost for the firm. Chapter Seven
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ch07 - Chapter 7 Costs and Cost Minimizatio n 1 Chapter...

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