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Unformatted text preview: leasing the capital to another firm -- these lost
profits are an “opportunity cost” to the firm of using its owned capital for its production5.
We will now see how to calculate the depreciation and opportunity costs in each period that the firm uses its own
capital to produce its own output. First, some nomenclature: let’s measure time as
where capital is
and has a “useful life” of
periods. For example, suppose a machine has a useful life of 4
periods (notice the distinction between “time” and “period”): 5 It is assumed that you have a solid understanding of “opportunity cost”. Review your lecture slides.
8 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. Period 2 Period 1 Period 3 Firm purchases capital at
or the beginning of
the first period Time
Let ( ) Useful life of capital ends
or the end of the
fourth period is the beginning of the first period; time is the beginning of the sec...
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This document was uploaded on 01/19/2014.
- Fall '14