Chapter7 - Part 2

# Chapter7 - Part 2 - The Cost of Production Chapter 7 Cost...

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The Cost of Production Chapter 7

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Cost in the Long Run us er cos t of capital Annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest. We can also express the user cost of capital as a rate per dollar of capital: The user cost of capital is given by the sum of the economic depreciation and the interest (i.e., the financial return) that could have been earned had the money been invested elsewhere. Formally,
For simplicity, we will work with two variable inputs: labor (measured in hours of work per year) and capital (measured in hours of use of machinery per year). The Price of Capital user cost : r = Depreciation rate + Interest rate. The Rental Rate of Capital Cost per year of renting one unit of capital. If the capital market is competitive, the rental rate should be equal to the user cost, r. Cost-Minimizing Input Choice

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is ocos t line: Graph showing all possible combinations of labor and capital that can be purchased for a given total cost. total cost C of producing any particular output is given by the sum of the firm’s labor cost wL and its capital cost rK: C = wL + rK If we rewrite the total cost equation as an equation for a straight line, we get K = C/r – (w/r)L slope = Δ K/ Δ L = −( w/r ) The Isocost Line
Producing a Given Output at Minimum Cos t Isocost curve C 1 is tangent to isoquant q 1 at A and shows that output q 1 can be produced at minimum cost with labor input L 1 and capital input K 1 . Other input combinations– L 2 , K 2 and L 3 , K 3 –yield the same output but at The Isocost Line

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When an Input Price Changes Facing an isocost curve C 1 , the firm produces output q 1 at point A . When the price of
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## This note was uploaded on 02/06/2012 for the course ECON 293 taught by Professor Akbulut during the Spring '11 term at South Carolina.

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Chapter7 - Part 2 - The Cost of Production Chapter 7 Cost...

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