microbook_3e-page107 - payments that the firm makes on its...

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Marginal Cost is NOT Average Variable Cost Average Variable Cost – the (Total) Variable Cost divided by total quantity produced. (It’s a simple fraction) . Marginal Cost – the increase in (Total) Variable Cost incurred by producing one additional unit of output. (It’s a derivative) . Marginal Cost curve intersects the Average (Total) Cost and Average Variable Cost curves at their minimum points. MC, AC, AVC Q MC AC AVC Short-Run Average and Marginal Cost x If a firm’s capital stock is fixed in the short-run, then the rental
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Unformatted text preview: payments that the firm makes on its capital stock is a fixed cost. x We can use that assumption to derive short-run average and marginal cost curves. x So start by assuming that a firm’s production function is given by: X=K 2/3 L 1/3 x Since the firm’s capital stock is fixed (by assumption) we can solve the production function for labor to find the amount of labor needed to produce various levels of output: 2 3 K X L x Its total costs are given by: wL rK TC . 2 3 K X w rK TC . Page 107...
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