This demonstrates the advantage of investing in a

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Unformatted text preview: tutes labor for capital but the percentage reduction in capital and percentage increase in labor depends partially on the returns to scale but also individual production function parameters (think 13 Note to self: can we work out which class of cost functions have an elasticity that is < 1? 41 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. of this as depending on the slope of the iso-quant). You should be prepared for test questions where you might be asked to work out and : Initial iso-cost line New iso-cost line Target Output 0 1 You should show that since regardless of the returns to scale: In other words, even though the price of capital has gone up, the firm offsets some of it by using less capital and more labor (after all, labor and capital are imperfect substitutes) with the result that costs increase less proportionately. You should also work out the elasticities for the US manufacturing sectors example. 8 Returns to Scale and the Functional Form of the Cost Function14 We’ve shown that for a Cobb-Douglas production function if there are increasing returns to scale then the cost function is strictly concave (i.e. ( ) () ), if there are constant returns to scale then the cost function is linear (i.e...
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This document was uploaded on 01/19/2014.

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