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Unformatted text preview: Problem (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (
) always exhibits constant returns to scale and
Now, recall that the complements production function
given the fact the input expansion path is always linear means that the cost function will always exhibits constant scale
economies. Let’s confirm this. The optimal cost of production is:
⏟ This is a linear cost function where: Since
is constant, the cost function exhibits constant scale economies. As before, we will examine the following
questions (but not in as much detail as the Cobb-Douglas CMP): ● Since What’s the relationship of optimal inputs and cost with output?
What happens to inputs and cost if the firm gets “better” (in the sense that
What happens to inputs and cost if the price of labor increases?
What happens to inputs and cost if the price of capital increases?
What is the relationship of cost, average cost and marginal cost with output?
we see that inpu...
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- Fall '14