ajaz_eco_204_2012_2013_chapter_12_Long_Run_CMP

Now the following graph shows the output optimal cost

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Unformatted text preview: n ( ) 45 degree line Just to benchmark the discussion let’s show 45 degree line as well Left side ( ) on this graph: Right side () ( ) ( ) Production Function ( ) 45 degree line 45 degree line Now consider what happens if we double inputs to . By definition the cost of inputs doubles to because there are increasing returns to scale, output will more than double (it has to be greater than and ): 44 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. Left side Right side () ( ) ( ) ( ) Production Function ( ) 45 degree line 45 degree line Now, to produce twice the initial output, i.e. to produce is due to increasing returns to scale): the firm needs to less than double inputs to say Left side (this Right side () ’ ( ) ( ) ( ) ’ 45 degree line Production Function ( ) 45 degree line ( ) and when we join Since we using less than the cost of inputs must be less than the ( ) the optimal cost of producing , with ( ) the optimal cost of producing , we see that the cost function mus...
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This document was uploaded on 01/19/2014.

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