Cost Curves We looked at cost curves c(y) vs. y. Now let us look at marginal cost and average cost curves. These are c’(y) vs y and c(y)/y vs. y, respectively. What are the curves for c(y)=y 2 ? How about the curves for c(y)=y 2 +1? Where do the marginal cost curve and average cost curve intersect (always)? Why? Bonus: What technology gives us cost curves of c(y)= y 2 +1?
Adding two cost curves? If you have two plants with costs c1(y) and c2(y), what is your combined costs? (Assume DRS.) For each additional unit, where would you produce it? How would this work for c1(y)=c2(y)=y 2 ?
Profit Maximization Revisited We can now write profit maximization of a competitive firm in terms of the cost function Max y p*y-c(y) What is the FOC? How does this relate to the FOC of the old profit maximization problem, p f’(x)=w? What is profits and choice of y if c(y)=y 2 ? With general c(y), when would a firm shut down?
Entry Assume firms freely enter a competitive industry where costs are fixed costs plus DRS (like c(y)=1+y 2 ). Demand is decreasing D’(q)<0. For a given price, up to where would a firm produce? When would a firm enter? When would a firm leave? What can the only competitive price be? What are profits here?
Licenses How about if we fix the amount of entry? One way is with licenses: Liquor, Taxi, etc.. Does this cause the profits to be positive? Licenses can be bought or sold on the market. What is your decision to buy a license? Does raising fares improve hourly wages of taxi drivers?
Two tier oil prices. In 1974 the US department of Energy wanted to prevent local oil producers from benefiting from OPEC. Two-tier: They prevented charging any more per barrel to refineries than before the boycott. Only half oil was domestic. This created a two-tiered system. Who benefited? Price controls: They then put price controls based upon costs. Caused problems/shortages. Entitlement: Then adopted policy of one-barrel of foreign allows you to buy one barrel of domestic. Tax: Finally, just levied a tax on domestic production.