1. Chapter 7 Costs

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

3. © 2004 Pearson Addison-Wesley. All rights reserved Figure 7.1 Short-Run Cost Curve 120 216 400 48 0610 4 28 Quantity,q, Units per day Quantity,q, Units per day 6 b a B A 4 2 8 C F 1 1 27 20 VC MC AC AVC AFC (a) (b) 60 28 27 20 8 0 Cost, S Cost per unit, $

4. © 2004 Pearson Addison-Wesley. All rights reserved7-4 Figure 7.2 Variable Cost and Total Product of Labor 24 120 46 230 20 100 5 25 77 385 Total product of labor, Variable cost L, Hours of labor per day VC =wL, Variable cost, $ 0 5 1 6 10 13 Quantity, q, Units per day

5. © 2004 Pearson Addison-Wesley. All rights reserved7-5 Application (Page 194) Short-Run Cost Curves for a Printing Firm 100200300 q, Units per year AFC AVC AC MC 0 20 30 40 50 10 Cost, kroner

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

7. © 2004 Pearson Addison-Wesley. All rights reserved7-7 Figure 7.3 Effect of a Specific Tax on Cost Curves 1558100 q, Units per day 80 37 27 $10 AC a = b +10 AC b MC b a = b +10 Costs per unit, $

8. © 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, $

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

10. © 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

11. © 2004 Pearson Addison-Wesley. All rights reserved7-11 Figure 7.5 Cost Minimization y x z 11650240 L, Units of labor per year 100 303 28 q = 100 isoquant 3,000-kr isocost 2,000-kr isocost 1,000-kr isocost K, Units of capital per year

12. © 2004 Pearson Addison-Wesley. All rights reserved7-12 Application (Page 205) Rice Milling on Java 50403020100 L, Workers per year 80 70 60 50 40 30 20 10 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

13. © 2004 Pearson Addison-Wesley. All rights reserved7-13 Figure 7.6 Change in Factor Price v x 77500L, Workers per year 100 52 q = 100 isoquant Original isocost, 2,000 kr New isocost, 1,032 kr K, Units of capital per year

14. Figure 7.7 Expansion Path and Long-Run Cost Curve x y z 10075500L, Workers per year 150 200 100 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 200100150 K, Units of capital per year C, Cost, kroner

15. Figure 7.7a Expansion Path and Long-Run Cost Curve x y z 10075500L, Workers per year 150 200 100 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

16. © 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 200100150 C, Cost, kroner

17. © 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, $

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

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

20. © 2004 Pearson Addison-Wesley. All rights reserved7-20 Application (Page 213) Average Cost of Cement Firms 3.03.32.01.02.51.50.5 AC q, Cement, million tons per year 7 6 5 4 0 Average cost, £

21. © 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 1 2 3 3 LRAC c q 2 q 1 q, Output per day 10 0 12 Average cost, $

22. © 2004 Pearson Addison-Wesley. All rights reserved7-22 Application (Page 216) Printing Firm 2006001,200 q, Output per year 0 20 30 40 10 SRAC 1 SRMC 1 SRAC 2 SRMC 2 LRAC = LRMC Cost, kroner

23. © 2004 Pearson Addison-Wesley. All rights reserved7-23 Application (Page 217) Oil Pipelines 200010004002001020401000 Thousand barrels per day 150 100 50 10 8" SRAC 10" SRAC 16" SRAC 12" SRAC 26" SRAC 20" SRAC 40" SRAC LRAC Cost per barrel mile

24. © 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 7 8 9 10 11 12 13 SRAC of laser printer SRAC of ink-jet printer LRAC Cents per page

25. © 2004 Pearson Addison-Wesley. All rights reserved7-25 Figure 7.10 Long-Run and Short- Run Expansion Paths 100 x y z 50159 Long-run expansion path 200 isoquant 100 isoquant Short-run expansion path 4,616 kr 4,000 kr 2,000 kr L, Workers per year0 100 200 K, Capital per year

26. © 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 250100150200500 C-141 planes (a) Learning by Doing on C-141 Aircraft 500 400 300 200 100 Average labor cost q 2 q 3 AC 3 2 1 q 1 Labor costs per plane Average cost, $

27. © 2004 Pearson Addison-Wesley. All rights reserved7-27 Figure 7.11a Learning by Doing 250100150200500 C-141 planes (a) Learning by Doing on C-141 Aircraft 500 400 300 200 100 Average labor cost Labor costs per plane

28. © 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 3 2 1 q 1 Average cost, $

29. © 2004 Pearson Addison-Wesley. All rights reserved7-29 Figure 7.12 Joint Production PPF 2 1 64 Wild strawberries, Pints per day 8 6 0 Mushrooms, Pints per day