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use the same amount of labor and capital as before. This is because the firm wants to always produce the target output
and the only way to do this is to use the inputs: This is why demands for labor and capital are independent of input prices and why demand for inputs in completely
inelastic to input prices: For example, the following graphs show the effect of higher wages upon labor, capital and cost: 51
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. Complements Production
Function Cobb-Douglas Production
Function Target output Target output 1
0 0 ⏟ In the complements CMP, as
, even though the firm continues to use the same amount of labor and
capital, the cost of production must of course increase. For example:
⏟ You can show that (why didn’t we use the log method?): [ [ This shows that if the firm expects input prices to be volatile then it mig...
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This document was uploaded on 01/19/2014.
- Fall '14