Chapter7 - Part 3

# Chapter7 - Part 3 - than Q A , firm will choose size S in...

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The Cost of Production Chapter 7

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Davy Metal Company has the following production function: Q = 500L 0.6 K 0.8 , MPL = 300L -0.4 K 0.8 MPK = 400L 0.6 K -0.2 Employees earn \$15 per hour. Rental charge is \$50 per hour on capital. Davy forecasts annual costs of \$500,000 per year. a. Determine the firmʹs optimal capital-labor ratio, given the information above. b. How much capital and labor should the firm employ, given the \$500,000 budget? Calculate the firmʹs output. A C T I V E L E A R N I N G A C T I V E L E A R N I N G Optimum input choice Optimum input choice
Long-Run versus Short-Run Cost The long-run average cost curve LAC is the envelope of the short-run average cost curves SAC 1 , SAC 2 , and SAC 3 .

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LAC with 3 factory Sizes SAC S SAC M SAC L Q Avg Total Cost Firm can choose from 3 factory sizes: S , M , L . Each size has its own SAC curve. The firm can change to a different factory size in the long run, but not in the short run.
ATC S ATC M ATC L Q Avg Total Cost Q A Q B LAC To produce less

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Unformatted text preview: than Q A , firm will choose size S in the long run. To produce between Q A and Q B , firm will choose size M in the long run. To produce more than Q B , firm will choose size L in the long run. LAC with 3 factory Sizes A Typical LAC Curve Q ATC In the real world, factories come in many sizes, each with its own SAC curve. So a typical LAC curve looks like this: LAC Long-Run versus Short-Run Cost Long-Run Cos t with Economies and Dis economies of Scale With economies and diseconomies of scale, the minimum points of the short-run average cost curves do not lie on the long-run average cost curve. CONCLUSION Costs are critically important to many business decisions, including production, pricing, and hiring. This chapter has introduced the various cost concepts. The following chapters will show how firms use these concepts to maximize profits in various market structures....
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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 3 - than Q A , firm will choose size S in...

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