ajaz_eco_204_2012_2013_chapter_13_Short_Run_CMP_PP

K fixed capital k q l optimal l d derive the short run

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Unformatted text preview: d) Derive the short run total cost function. Examine the functional form when there are increasing, constant and decreasing returns. Answer The cost of producing target output in the short run is: () Substitute: () [ Here, the total fixed cost is: and the total variable cost is: ( ) ( ) . Since the company is a price taker this can be expressed as: () ( ) The “shape” or the functional form of total cost stems from that of total variable cost. See table below: 7 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. Returns Functional Form () Increasing ( Constant ( ( ) ) ) Decreasing ( Non-linear; concave Linear ( ) q q Constant Returns (Cobb-Douglas α =1) ) q L L $ $ Non-linear; convex L $ C = TFC + TVC C = TFC + TVC TVC = PLL TVC = PLL TFC = PKk TFC = PKk TFC = PKk q q q (e) Derive the short run average variable cost and average cost functions. Examine the functional form when there are increasing, constant and decreasing returns. In particular where does the U shaped short run AC come from? Answer The cost of producing target output in the short run is: () The average cost is: () () The average variable cost is: () () 8 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. () Returns Increasing ( () ) Constant ( ) Decreasing ( Functional Form Declines with output () Constant with output () ) $ Rises with output $ $ TVC TVC TVC q q q $ $ $ AVC AVC AVC q q q $ $ Constant Returns $ AVC AVC AFC AFC $ q q q $ $ AC AC q q q Any production function with fixed inputs and decreasing returns in variable inputs will have a U shaped AC curve. (13.6) Ajax Corporation has production function and has target output q. Currently, and (a) Under what conditions will Ajax ha...
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This document was uploaded on 01/19/2014.

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