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Unformatted text preview: ch 10: COSTS 1 Cost function Derivation of the cost function mathematically and graphically Some more concepts associated with costs ◦ Total fixed cost and total variable cost ◦ Average fixed cost and average variable cost ◦ Marginal cost Short run vs long run costs ch 10: COSTS 2 What does the cost of production depends on? ◦ Level of output ◦ The factor prices (prices of inputs) ◦ The type of production technology ◦ Efficiency of production Naturally a cost function is one that somehow relates all of the above. Definition: ◦ It is a function C(q, w K , w L ) that relates the minimum costs C to a given output amount q. ◦ Note “minimum costs C to a given output”, implying an efficient relation between C and q. ch 10: COSTS 3 Mathematically ◦ We obtain the cost function by solving the cost minimization problem: such that ◦ In words: choose the inputs so as to minimize the costs to produce an output q at given prices of labor and capital. Again, use Lagrange multipliers to solve ◦ Let K*(q) and L*(q) be the solutions to the cost minimization problem for output level q ◦ The cost function is C(q)= w K K* (q) + w L L* (q) ◦ This is the socalled longrun cost function ch 10: COSTS 4 ) , ( m i n , L K f q L w K w L K L K Graphically solving the cost minimization problem....
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 Spring '11
 Beryl Li
 Macroeconomics, Economics of production

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