Lectures in Microeconomics-Charles W. Upton Applications of Cost Functions

Allocating output between two different plants A manufacturer has two different plants, A and B. He wants to produce q*. How should he allocate the production between the two plants?

Applications of Cost Functions The two AC and MC functions AC MC Plant A

Applications of Cost Functions The two AC and MC functions AC MC AC Plant APlant B

Applications of Cost Functions Optimizing Production q* MC B MC A Graph MC of plant A in the usual fashion

Applications of Cost Functions Optimizing Production q* MC B MC A But graph MC of plant B relative to the right axis

Applications of Cost Functions Optimizing Production q* qaqa qbqb MC B MC A Set output where MC A = MC B

Applications of Cost Functions Wrong Answers q* qaqa qbqb MC B MC A Use plant with lower AC Use plant with lower MC

Applications of Cost Functions New Plants AC MC Plant A-Old Design

Applications of Cost Functions New Plants AC MC AC Plant A-Old Design Plant B-New Design

Applications of Cost Functions New Plants AC MC AC LRMC

Applications of Cost Functions New Plants AC MC AC LRMC qaqa

Applications of Cost Functions The Moral of the Story MC A = MC B

Applications of Cost Functions The Moral of the Story MC A = MC B LRMC = minimum of AC MC AC LRMC

Applications of Cost Functions End ©2004 Charles W. Upton