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Unformatted text preview: ustration let’s do an example to
understand the difference between a short and long run CMP. Suppose a firm’s short run CMP is (how do you know this
is a short run CMP? Remember, in ECO 204, fixed inputs are denoted by lowercase letters): ( ) 5
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. In this CMP with a fixed and a variable input there’s no need to solve for the “optimal” because in fact there is only
value for at which the firm can produce
(you should verify that the answer is
Iso-quant curve for Constraint Constraint With and the “optimal” total cost of producing 100 units is:
( ) ( ) The graph below shows the “optimal” iso-cost line, iso-quant curve and optimal choice for this short-run CMP -- you
should notice see at the optimal solution, the iso-quant curve is NOT tangent to the iso-cost line (as was the case in the
long run CMP). You should take a long walk (by yourself) and think about why this is the case and that in general the
short run “optimal” cost must always be greater than or equal to (never le...
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This document was uploaded on 01/19/2014.
- Fall '14