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ajaz_eco_204_2012_2013_chapter_13_Short_Run_CMP_PP

# Eco 204 s ajaz hussain do not distribute c for a given

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Unformatted text preview: rt run cost function? Answer Now the short run cost function is (note the small “k”): () () ( () ere the Total Fixed Cost TFC is 1 ( ) while the Total ariable Cost is Suppose Ajax has constant returns so that α = 1. Then ( ) ), () () () ( ) and ( ) () If the short run production function is linear, so is the TVC(q) function. Since TFC is a constant this implies that the short run C(q) is also linear: See below 11 ECO 204 Chapter 13: Practice Problems & Solutions for The Short 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. (d) Will Ajax’s short run AC decline, remain constant, or increase with q? Answer Ajax’s Average Cost (AC) function is () () therefore, ( () () ( ) ) Observe that if there are constant returns so that α = 1: () () AVC(q) is constant, AFC is declining with q, so that AC(q) declines with q. Note the similarities between long and short run AC: • In the long run, if there are RTS = 1 then long run AC(q) is constant. In the short run if there are constant returns, AVC(q) is constant (what is the shape of the short run AC(q) curve?) • In the long run, if there are RTS > 1 then long run AC(q) is decreasing. In the short run if there are increasing returns, AVC(q) is decreasing (what is the shape of the short run AC(q) curve?) • In the long run, if there are RTS < 1 then long run AC(q) is increasing. In the short run if there are decreasing returns, AVC(q) is increasing (what is the shape of the short run AC(q) curve?) (13.7) Given The short run production function is: The short run cost minimizing amount of labor is: The short run cost function is: ( ) ( ) ( ) ( ) Suppose the company has constant returns (not the same as constant returns to scale) (a) What is the short run production function? Answer With capital fixed and labour variable production functions become If there are constant retu...
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