ajaz_eco_204_2012_2013_chapter_12_Long_Run_CMP

You should also work out the elasticities for the us

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: . () () ), while if there are decreasing returns to scale then the cost function is strictly convex (i.e. () () ). For example: 14 Note to self: maybe this section should come earlier 42 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. “Cobb-Douglas” Cost Function ( ) Increasing RTS Constant RTS Decreasing RTS Strictly concave cost function Linear cost function Strictly convex cost function In fact, this is a general result (true of any production function). Here is a “simple” graphical proof – take a look at this ( ) with increasing returns to scale15: rather odd graph of a production function Left side Right side () Production Function ( ) 45 degree line 45 degree line If there are increasing returns to scale it means that doubling inputs more than doubles output; put another way, to produce double the output we need to less than double inputs. Now, the following graph shows the output , “optimal” cost ( ) and the cost of inputs to produce 15 Note to self: for next version do math proof. 43 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 Functio...
View Full Document

Ask a homework question - tutors are online