for given input prices, isocosts farther from the origin are associated with

Changes in Isocost LinesFor given input prices, isocosts fartherfrom the origin are associated with highercostsChanges in input prices change the slopeof the isocost line21Changes

for given input prices, isocosts farther from the origin are associated with

Changes in Isocost LinesFor given input prices, isocosts fartherfrom the origin are associated with highercostsChanges in input prices change the slopeof the isocost line21Changes in the Isocost Line22Labor Input (L)0Capital Input (K)Less expensive inputbundlesMore expensive inputbundlesChanges in the Isocost Line23Labor Input (L)0Capital Input (K)24Cost MinimizationMarginal product per dollar spent should beequal for all inputs:But, this is just:rwMPMPrMPwMPKLKLrwMRTSKL25Which Input Mix Would YouChoose?26Cost MinimizationQLKPoint of CostMinimizationSlope of Isocost=Slope of Isoquant27Examplea firm uses 4 word processors and 2typewriters to produce reportsMP of a typewriter is 50 pages / dayMP of a word processor is 500 pages / dayrental price of a typewriter is $1 / dayrental price of a word processor is $50 / dayQ: Is the firm utilizing typewriters and wordprocessors in a cost-minimizing manner?Optimal Input Substitution28Labor Input (L)0BCapital Input (K)New cost-minimizingpoint due to higher wageAInitial point of cost minimizationHIFJG29Cost AnalysisShort-RunFixed costs (FC)Sunk costsShort-run variable costs (VC)Short-run total costs (TC)Long-RunAll costs are variableNo fixed costs30Total and Variable CostsCost Function, C(Q):Minimum total cost ofproducing alternativelevels of output:C(Q)= VC(Q) +FCVC(Q): Costs that varywith outputFC: Costs that do notvary with output$QC(Q)= VC +FCVC(Q)FC031Fixed and Sunk CostsFC:Costs that do notchange as outputchanges.Sunk Cost:A cost thatis forever lost after it hasbeen paidDecision makers shouldignore sunk costs tomaximize profit orminimize losses$QFCC(Q) = VC + FCVC(Q)32Sunk Costs ExampleYou are the manager of a coal company andhave just paid $10000 to lease a railcar for onemonth: FC = $10000If the lease does not permit you to recoupanything once it has been paid, the entire$10000 is a sunk costIf the lease states that you will be refunded$6000 if you dont need the railcar, then only$4000 of the $10000 in FC are sunk cost33Some DefinitionsAverage Total CostATC = AVC + AFCATC = C(Q)/QAverage Variable CostAVC = VC(Q)/QAverage Fixed CostAFC = FC/QMarginal CostMC =ΔC/ΔQ$QATCAVCAFCMCMin of AVCMin of ATC

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