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Use the fact that both companies have constant returns and therefore . For AMD: ()
⏟ [ ⏟ () () ⏟ [ [ For Intel: ()
⏟ () [ ⏟ ()
⏟ [ [ 34 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Use the hint that both companies pay the same price for materials.
For AMD this implies:
⏟ [ For Intel this implies:
⏟ [ Combining we have: Next, use the fact that both companies ● employ the same amount of labor (i.e.
) ● have identical parameters
⏟ ) ● use the same level of capital ⏟ That is, AMD’s level of technology and management is 75% of Intel’s and explains why -- given same level of inputs,
input prices, production function and parameters -- AMD has the higher average variable cost.
(12.11) Recall that the PDS’s “variable” inputs were quasi-variable power (denote by ) and quasi-variable labor (denote
by ) while its “fixed” inputs were quasi-fixed power, quasi-fixed labor and all other inputs. Denote all “fixed” inputs as
capital . Suppose PDS’s production function is: Assume
. Suppose the price of power is
/hour and the price of “capital” is . Given that
quasi-variable power ? Hint: Solve the CMP and use the fact that /hour and /hour, the price of quasi-variable labor is
hour what is the price of hour. Show all calculations below. Answer
We are told that:
ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. This means that: To find we need to express the optimal demand for power
This means we have to solve the CMP.
The total cost of in terms of the parameters and (hopefully) solve for . hours of data services is:
() We could substitute values for some parameters now or we could work as long as possible in parametric form and then
substitute numbers. We’ll do the latter so that you can see the algebra.
The Cost Minimization Problem (CMP) is:
Now: so that:
() Since the production function is of th...
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- Fall '14