Chapter 7 Costs

© 2004 Pearson Addison-Wesley. All rights reserved7-2 Table 7.1 Variation of Short-Run Cost with Output

© 2004 Pearson Addison-Wesley. All rights reserved Figure 7.1 Short-Run Cost Curve Quantity,q, Units per day Quantity,q, Units per day 6 b a B A C F VC MC AC AVC AFC (a) (b) Cost, S Cost per unit, $

© 2004 Pearson Addison-Wesley. All rights reserved7-4 Figure 7.2 Variable Cost and Total Product of Labor Total product of labor, Variable cost L, Hours of labor per day VC =wL, Variable cost, $ Quantity, q, Units per day

© 2004 Pearson Addison-Wesley. All rights reserved7-5 Application (Page 194) Short-Run Cost Curves for a Printing Firm q, Units per year AFC AVC AC MC Cost, kroner

© 2004 Pearson Addison-Wesley. All rights reserved7-6 Table 7.2 Effect of a Specific Tax of $10 per Unit on Short-Run Costs

© 2004 Pearson Addison-Wesley. All rights reserved7-7 Figure 7.3 Effect of a Specific Tax on Cost Curves q, Units per day $10 AC a = b +10 AC b MC b a = b +10 Costs per unit, $

© 2004 Pearson Addison-Wesley. All rights reserved7-8 Page 197 Solved Problem 7.1 /q q, Units per day AC b q a MC q b a = b + /q Costs per unit, $

© 2004 Pearson Addison-Wesley. All rights reserved7-9 Table 7.3 Bundles of Labor and Capital that Cost the Firm $100

© 2004 Pearson Addison-Wesley. All rights reserved7-10 Figure 7.4 A Family of Isoquant Lines a b d e c $150 isocost$100 isocost$50 isocost $100 ——— $5 = 20 $150 ——— $5 = 30 $50 ——— $5 = 10 $100 ——— $10 = $50 ——— $10 5 = $150 ——— $10 15 = L, Units of labor per year K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved7-11 Figure 7.5 Cost Minimization y x z L, Units of labor per year q = 100 isoquant 3,000-kr isocost 2,000-kr isocost 1,000-kr isocost K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved7-12 Application (Page 205) Rice Milling on Java L, Workers per year Large bulk facility Small bulk facility Large rice mill Small rice mill Hand pounding Isoquant C 2 isocostC 1 K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved7-13 Figure 7.6 Change in Factor Price v x 77500L, Workers per year q = 100 isoquant Original isocost, 2,000 kr New isocost, 1,032 kr K, Units of capital per year

Figure 7.7 Expansion Path and Long-Run Cost Curve x y z L, Workers per year Expansion path (a) Expansion Path 3,000-kr isocost 2,000-kr isocost 4,000-kr isocost 100 isoquant 150 isoquant 200 isoquant X Y Z 0q, Units per year 4,000 3,000 2,000 Long-run cost curve (b) Long-Run Cost Curve K, Units of capital per year C, Cost, kroner

Figure 7.7a Expansion Path and Long-Run Cost Curve x y z L, Workers per year Expansion path (a) Expansion Path 3,000-kr isocost 2,000-kr isocost 4,000-kr isocost 100 isoquant 150 isoquant 200 isoquant K, Units of capital per year

© 2004 Pearson Addison-Wesley. All rights reserved7-16 Figure 7.7b Expansion Path and Long-Run Cost Curve X Y Z 0q, Units per year 4,000 3,000 2,000 Long-run cost curve (b) Long-Run Cost Curve C, Cost, kroner

© 2004 Pearson Addison-Wesley. All rights reserved Figure 7.8 Long-Run Cost Curves q*q, Quantity per day (a) Cost Curve C q*q, Quantity per day MC AC (b) Marginal and Average Cost Curves Cost, S Cost per unit, $

© 2004 Pearson Addison-Wesley. All rights reserved7-18 Table 7.4 Returns to Scale and Long-Run Costs

© 2004 Pearson Addison-Wesley. All rights reserved7-19 Table 7.5 Shape of Average Cost Curves in Canadian Manufacturing

© 2004 Pearson Addison-Wesley. All rights reserved7-20 Application (Page 213) Average Cost of Cement Firms AC q, Cement, million tons per year Average cost, £

© 2004 Pearson Addison-Wesley. All rights reserved7-21 Figure 7.9 Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves a b d e SRAC LRAC c q 2 q 1 q, Output per day Average cost, $

© 2004 Pearson Addison-Wesley. All rights reserved7-22 Application (Page 216) Printing Firm ,200 q, Output per year SRAC 1 SRMC 1 SRAC 2 SRMC 2 LRAC = LRMC Cost, kroner

© 2004 Pearson Addison-Wesley. All rights reserved7-23 Application (Page 217) Oil Pipelines Thousand barrels per day " SRAC 10" SRAC 16" SRAC 12" SRAC 26" SRAC 20" SRAC 40" SRAC LRAC Cost per barrel mile

© 2004 Pearson Addison-Wesley. All rights reserved7-24 Application (Page 218) Choosing an Ink-Jet or a Laser Printer 4,0002,0006,0008,0000 q, Pages SRAC of laser printer SRAC of ink-jet printer LRAC Cents per page

© 2004 Pearson Addison-Wesley. All rights reserved7-25 Figure 7.10 Long-Run and Short- Run Expansion Paths 100 x y z Long-run expansion path 200 isoquant 100 isoquant Short-run expansion path 4,616 kr 4,000 kr 2,000 kr L, Workers per year K, Capital per year

© 2004 Pearson Addison-Wesley. All rights reserved Figure 7.11 Learning by Doing A B C b c q, Output per period (b) Economies of Scale and Learning by Doing Learning by Doing Economies of scale C-141 planes (a) Learning by Doing on C-141 Aircraft Average labor cost q 2 q 3 AC q 1 Labor costs per plane Average cost, $

© 2004 Pearson Addison-Wesley. All rights reserved7-27 Figure 7.11a Learning by Doing C-141 planes (a) Learning by Doing on C-141 Aircraft Average labor cost Labor costs per plane

© 2004 Pearson Addison-Wesley. All rights reserved7-28 Figure 7.11b Learning by Doing A B C b c q, Output per period (b) Economies of Scale and Learning by Doing Learning by Doing Economies of scale q 2 q 3 AC q 1 Average cost, $

© 2004 Pearson Addison-Wesley. All rights reserved7-29 Figure 7.12 Joint Production PPF Wild strawberries, Pints per day Mushrooms, Pints per day