Costs

Intermediate Microeconomics
Section 6
Intermediate Microeconomics () Costs Section 6 1 / 22
Costs in the Short-Run
Costs
FC = rK
0
VC = wL
1
TC = rK
0
+wL
1
Intermediate Microeconomics () Costs Section 6 2 / 22
Costs in the Short-Run
The Relationship Between TP and TC
Intermediate Microeconomics () Costs Section 6 3 / 22
Costs in the Short-Run
Other Short-Run Costs
AFC
Q
1
=
FC
Q
1
=
rK
0
Q
1
AVC
Q
1
=
VC
Q
1
Q
1
=
wL
1
Q
1
ATC
Q
1
=
(rK
0
+wL
1
)
Q
1
MC
Q
1
=
TC
Q
1
Q
1
=
VC
Q
1
Q
1
=
wL
1
Q
1
Intermediate Microeconomics () Costs Section 6 4 / 22
Costs in the Short-Run
Graphing Short-Run Costs
Intermediate Microeconomics () Costs Section 6 5 / 22
Allocating Between Production Processes
MC
A
= 12Q
A
ATC
A
=
16
Q
A
+ 6Q
A
MC
B
= 4Q
B
ATC
B
=
240
Q
B
+ 2Q
B
What is the least costly way to produce 32 units?
Intermediate Microeconomics () Costs Section 6 6 / 22
Allocating Between Production Processes
An Example
Minimum cost MC
A
Q
A
= MC
B
Q
B
equating MC: 12Q
A
= 4Q
B
must produce 32 units total: Q
B
= 32 Q
A
substituting into MC condition: 12Q
A
= 128 4Q
A
Q
A
= 8
Intermediate Microeconomics () Costs Section 6 7 / 22
Relationship Between MP, AP, MC, and AVC
MC =
w
MP
AVC =
w
AP
Intermediate Microeconomics () Costs Section 6 8 / 22
Costs in the Long Run
TC = wL +rK
Intermediate Microeconomics () Costs Section 6 9 / 22
Costs in the Long Run
Cost Minimization
MP
L
MP
K
=
w
r
MP
L
w
=
MP
K
r
Intermediate Microeconomics () Costs Section 6 10 / 22
Costs in the Long Run
Why Do Unions Support Minimum Wages?
Intermediate Microeconomics () Costs Section 6 11 / 22
Costs in the Long-Run
Expansion Path
The locus of tangencies traced out by an isocost line of given slope as it shifts outwards
into the isoquant map for a production process.
Intermediate Microeconomics () Costs Section 6 12 / 22
Costs in the Long-Run
Expansion Path
Intermediate Microeconomics () Costs Section 6 13 / 22
Costs in the Long-Run
From Expansion Path to Total Cost
Intermediate Microeconomics () Costs Section 6 14 / 22
Costs in the Long-Run
Other Long-Run Costs
LMC
Q
=
LTC
Q
Q
LAC
Q
=
LTC
Q
Q
Intermediate Microeconomics () Costs Section 6 15 / 22
Costs and Returns to Scale
Constant Returns to Scale
Intermediate Microeconomics () Costs Section 6 16 / 22
Costs and Returns to Scale
Decreasing Returns to Scale
Intermediate Microeconomics () Costs Section 6 17 / 22
Costs and Returns to Scale
Increasing Returns to Scale
Intermediate Microeconomics () Costs Section 6 18 / 22
Returns to Scale and Industry Structure
Concentrated Industries
Intermediate Microeconomics () Costs Section 6 19 / 22
Returns to Scale and Industry Structure
Unconcentrated Industries
Intermediate Microeconomics () Costs Section 6 20 / 22
Long-Run v. Short-Run Costs
Intermediate Microeconomics () Costs Section 6 21 / 22
In-Class Questions
1
Sketch the TC, VC, FC, ATC, AVC, AFC, and MC curves for the production
function Q=3KL where K=2, r=3, and w=2.
2
A rm has access to two production processes:
MC
1
= .4Q MC
2
= 2 + .2Q
1 If it wants to produce 8 units of output, how much should it produce with with each
process?
2 If it wants to produce 4 units of output?
3
A rm has a production function Q = f (K, L) with constant returns to scale. Input
prices are r=3 and w=2. The output expansion path for this production function at
these input prices is a straight line through the origin. When it produces 5 units of
output, it uses 2 units of K and 3 units of L. How much K and L will it use when its
long-run total cost is equal to 120.
Intermediate Microeconomics () Costs Section 6 22 / 22