L17 Cost Functions.

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Presentation transcript:

L17 Cost Functions

Producers Producers: have technology Returns to scale Constant Decreasing Increasing

Returns to Scale (Cobb-Douglass)

Quiz Assume production function Doubling inputs More than doubles output Less than doubles output Doubles output

Profit Maximization and Price taking DRS: secrets of happiness CRS and IRS problem

Cost Minimization Profit maximization: two stages Managers: how much to sell Engineers: How to produce it Today: second stage - cost minimization! Technology + input prices = cost function

Isoquant

Technical Rate of Substitution (TRS)

Isocost map

Secret of Happiness

Example

Arbitrary y, (DRS)

Arbitrary y (CRS)

Arbitrary y (IRS)

Profit Maximization and Cost Minimization Profit Maximization (DRS) Cost Minimization?