Chapter 7: COST ANALYSIS
1. Relevant costs
2. Cost functions (short run and long run)
3. Economies of scale and scope
4. The learning curve
5. Cost analysis and optimal decisions (short run and long run)
Reading: All (We will not cover the Appendix)
Problems: 1,2,4,5,7,-9,11,12
WHAT YOU SHOULD BE ABLE TO DO
1. Know all the relevant cost relationships (tables, graphs, equations) involving: TFC, TVC, STC, AFC, AVC, SMC.
2. Understand relationships between production and costs, especially between MP and SMC, and AP and AVC.
3. Find munimum of AVC and LAC and understand the significance.
4. Understand relationship between returns to scale and economies of scale; determine economies of scope.
5. Work out simple problems involving the learning curve.
6. Understand implications of short and long-run profit maximization.
EXAMPLE (Continuation of Chapter 6 example)
For the production function example given above for Chapter 6, assume that K=5, PL=$10 and PK=$20.
a. Add the following columns to the table previously described in part b: TFC, TVC, STC, AFC, SAC, and SMC (using finite changes).
b. Develop the equation relating STC to Q, i.e., find the total short-run cost equation.
c. Find the equations for: AFC, AVC, SAC, and SMC.
d. Determine the level of output that minimizes AVC.
e. Determine the level of output that minimizes SAC and determine the minimum value for SAC.
f. If the firm's demand is Q = 3600 - 200P, determine the short-run profit-maximizing price, level of output, and profit.
g. Explain the shape of the firm's LAC (K is no longer fixed). Where will the firm's LMC lie in relation to the LAC?