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Lecture Notes 5 - Cost Minimization Isoquants and Isocost...

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Cost Minimization Isoquants and Isocost lines Production Function: F(L, K) = Q Input Costs = wL + rK Cost Function: C(Q, w, r)
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Input Substitution Marginal rate of technical substitution (MRTS) = (Marginal product of L)/(Marginal product of K) = w/r (the tangency condition), where there is cost minimization for the target output level
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How Production Expands The Impact On Costs
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Concepts of Production Cost Total cost : this is the minimized cost for producing Q short run vs. long run Average total cost (ATC or AC) = (Total cost)/Q Fixed costs are the portion of TC that do not vary with Q, even in the long run Marginal cost = the additional cost per additional Q Variable costs are the portion of TC that vary with Q Sunk costs cannot be reversed over the short run Avoidable costs can be reversed Q C MC =
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Profit Maximization for a Competitive Firm (for which price = marginal revenue) Quantity 0 MC ATC MC 1 Q 1 MC 2 Q 2 The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue.
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