{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

This preview shows pages 1–6. Sign up to view the full content.

Chapter 7 Costs and Cost Minimization

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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.
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 .

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Isocost Lines
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.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 24

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

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online