L16 Cost Functions.

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Presentation transcript:

L16 Cost Functions

Producers Producers: have technology Assumptions: They maximize profit They are price takers

Profit Maximization DRS: secrets of happiness CRS problem: problem well defined only for IRS profit either zero or infinity

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

Technical Rate of Substitution (TRS)

Technical Rate of Substitution (TRS)

Secret of Happiness

Example

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

Arbitrary y

DRS and Cost Function

Constant Returns to Scale

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