Unformatted text preview: as CMP does not generate the ECO 100 “U-shaped” curve. Let’s quantify the link between inputs and output: use the “log method” for computing elasticities to show that: Producing greater output requires more inputs, with increasing returns to scale a 1% increase in output requires a less
than 1% increase in inputs and therefore less than 1% increase in cost; constant returns to scale a 1% increase in output
requires a 1% increase in inputs and therefore 1% increase in cost; decreasing returns to scale a 1% increase in output
requires more than 1% increase in inputs and therefore more than 1% increase in cost (you should think whether this
makes intuitive sense). You should be prepared for test questions where you might be asked to work out and . For example: 39
ECO 204 Chapter 12: a Firm’s Cost Minimization Problem (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Elasticity of with respect to Tobacco Produ...
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