Lecture 18 - Costs: Envelopes and Applications (B&B Chapter...

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Northwestern University ECON 310-1: Microeconomic Theory Professors Jim Hornsten and Ron Braeutigam Winter 2012 Costs: Envelopes and Applications Notes for Lecture #18 From Learning Outcome 6 on syllabus: You will be able to apply the optimal choice model for producers to show the relationship between production functions [and] cost curves and supply curves in the short run and in the long run.
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Northwestern University ECON 310-1: Microeconomic Theory Professors Jim Hornsten and Ron Braeutigam Winter 2012 Long Run and Short Run Expansion Paths K L LR Expansion Path A B C 2 million units 1 million units 3 million units K 1 SR Exp. Path, K = K 1 Example: K 1 is the optimally sized plant if the firm needs to produce 1 m. units. If the firm must operate with K 1 in the SR, its SR costs will be the same as the LR costs. If the firm must operate with K 1 in the SR, its SR costs will be higher than LR costs for any Q other than 1 m. units. The LR Expansion Path tells us that there is an optimal level of K for every required Q.
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Northwestern University ECON 310-1: Microeconomic Theory Professors Jim Hornsten and Ron Braeutigam Winter 2012 Long Run and Short Run Costs $ per unit LRAC(Q) LRMC(Q) 1 million 2 million 3 million Q K 1 is the plant size that minimizes LRTC when Q = 1 If the firm must operate with K 1 in the SR, its SR costs will be higher than LR costs for any Q other than 1 m. units. SMC 1 (Q) SAC 1 (Q)
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Northwestern University ECON 310-1: Microeconomic Theory Professors Jim Hornsten and Ron Braeutigam Winter 2012 Short Run and Long Run Expansion Paths K L LR Expansion Path A B C 2 million units 1 million units 3 million units K 3 K 2 K 1 SR Exp. Path, K = K 3 SR Exp. Path, K = K 2 SR Exp. Path, K = K 1 K 1 is the optimally sized plant if the firm needs to produce 1 m. units. If the firm must operate with K
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This note was uploaded on 02/16/2012 for the course ECON 310-1 taught by Professor Schulz during the Winter '08 term at Northwestern.

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Lecture 18 - Costs: Envelopes and Applications (B&B Chapter...

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