Ch07 - Chapter 7 Costs and Cost Minimization The...

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Chapter 7 Costs and Cost Minimization
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The Cost-Minimization Problem In ch.6 we saw firms can produce a given amount of output using different combinations of inputs (isoquant). Then firm’s decision problem is: How to choose a combination of inputs to minimize the cost of producing a given quantity of output. Cost-minimization problem: The problem of finding the input combination that minimizes a firm’s total cost of producing a particular level of output. Cost-minimizing firm: A firm that seeks to minimize the cost of producing a given amount of output. To study firm’s cost-minimization problem, we have to distinguish between the long run and the short run . Long-run: The period of time that is long enough for the firm to vary the quantities of all of its inputs as much as it desires. Short-run: The period of time in which at least one of the firm’s input quantities cannot be changed.
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The Long-Run Cost-Minimization Problem Suppose that a firm decided to produce Q 0 . The firm wants to produce Q 0 by minimizing the total cost, TC . The total cost equation is TC = wL + rK . where: The price of a unit of labor services (the wage rate) is w . The price of a unit of capital services is r . Isocost line: The set of combinations of labor and capital that yield the same total cost for the firm. For example: w = $10, r = $20 and TC = $1 million. What is the total cost equation? Draw the $1 million isocost line. K = (TC/r) – (w/r) L .
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Isocost Lines
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The Long-Run Cost-Minimization Problem Suppose a firm want to produce Q 0 and its isoquant and isocost lines are given as in the figure (next slide). Point G is off the isoquant, technically inefficient. Points E and F are efficient, but not cost-minimizing. Point A has to be the cost-minimizing combination.
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This note was uploaded on 02/29/2012 for the course 320 322 taught by Professor Macro-williams,micro-yoshi during the Fall '10 term at Rutgers.

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Ch07 - Chapter 7 Costs and Cost Minimization The...

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