1. Lectures in Microeconomics-Charles W. Upton Additional Properties of Cost Functions

2. Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up?

3. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? AC MC

4. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? AC MC AC

5. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? AC MC AC

6. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? AC MC AC

7. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? AC MC AC Here AC and MC are both up

8. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? AC MC AC But look at this case

9. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? AC > AC

10. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? But MC < MC!

11. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? AC yes, MC maybe

12. Additional Properties of Cost Functions Fourth Trick Question Does an increase in total cost mean that AC and MC have both gone up? The minimum of the AC occurs at a higher level of output

13. Additional Properties of Cost Functions Fifth Trick Question Does improved technology mean lower costs?

14. Additional Properties of Cost Functions Fifth Trick Question Does improved technology mean lower costs? Improved technology means fewer inputs for same output.

15. Additional Properties of Cost Functions Fifth Trick Question Does improved technology mean lower costs? Improved technology means fewer inputs for same output.

16. Additional Properties of Cost Functions Fifth Trick Question Does improved technology mean lower costs? Improved technology means fewer inputs for same output. Maybe yes, maybe no

17. Additional Properties of Cost Functions Three Principles of Technology  Don’t confuse changes in technology with changes in technique. –Every time we move from one point on the production isoquant to another, we change technique

18. Additional Properties of Cost Functions Three Principles of Technology  Don’t confuse changes in technology with changes in technique.  Distinguish between firm specific technologies and industry technologies.

19. Additional Properties of Cost Functions Three Principles of Technology  Don’t confuse changes in technology with changes in technique.  Distinguish between firm specific technologies and industry technologies.  T echnological change occurs gradually.

20. Additional Properties of Cost Functions Sixth Trick Question  Last year, Acme Widgets produced widgets at $5 each. This year the plant manager reports that he can cut production cost to $4 each. Does this mean he simply was not doing his job last year?

21. Additional Properties of Cost Functions Sixth Trick Question Perhaps

22. Additional Properties of Cost Functions Sixth Trick Question Perhaps Then again, he may have exploited the learning curve.

23. Additional Properties of Cost Functions Sixth Trick Question Perhaps Then again, he may have exploited the learning curve. MC Cumulative Production

24. Additional Properties of Cost Functions Sixth Trick Question Perhaps Then again, he may have exploited the learning curve. MC Cumulative Production The more you make the better you get at it

25. Additional Properties of Cost Functions Seventh Trick Question Acme Widgets produced widgets for $5 last year and $4 this year

26. Additional Properties of Cost Functions Seventh Trick Question Acme Widgets produced widgets for $5 last year and $4 this year A new competitor, Wonder Widgets, figures that it can produce widgets for $4.50 each.

27. Additional Properties of Cost Functions Seventh Trick Question Acme Widgets produced widgets for $5 last year and $4 this year A new competitor, Wonder Widgets, figures that it can produce widgets for $4.50 each. Does it mean that Wonder Widgets stole trade secrets from Acme?

28. Additional Properties of Cost Functions Seventh Trick Question Perhaps

29. Additional Properties of Cost Functions Seventh Trick Question Perhaps But one can learn from observing –Reverse engineering –Talk in the trade

30. Additional Properties of Cost Functions Seventh Trick Question Perhaps But one can learn from observing –Reverse engineering –Talk in the trade The point is that trade secrets are hard to keep

31. Additional Properties of Cost Functions End ©2004 Charles W. Upton