1. Chapter Seven Costs

2. © 2007 Pearson Addison-Wesley. All rights reserved.7–2 Table 7.1 Variation of Short-Run Cost with Output

3. © 2007 Pearson Addison-Wesley. All rights reserved.7–3 Figure 7.1 Short-Run Cost Curves 120 216 400 48 0 610 4 28 Quantity, q, Units per day Quantity, q, Units per day 6 b a B A 428 C F 1 1 27 20 VC MC AC AVC AFC (a) (b) 60 28 27 20 8 0

4. © 2007 Pearson Addison-Wesley. All rights reserved.7–4 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 0 5 1 6 10 13 L, Hours of labor per day VC = wL, Variable cost, $

5. © 2007 Pearson Addison-Wesley. All rights reserved.7–5 Application (Page 188) Short-Run Cost Curves for a Furniture Manufacturer 100200300 q, Units per year AFC AVC AC MC 0 20 30 40 50 10

6. © 2007 Pearson Addison-Wesley. All rights reserved.7–6 Table 7.2 Effect of a Specific Tax of $10 per Unit on Short-Run Costs

7. © 2007 Pearson Addison-Wesley. All rights reserved.7–7 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

8. © 2007 Pearson Addison-Wesley. All rights reserved.7–8 Page 190 Solved Problem 7.1 / q q, Units per day AC b q a MC q b a = b + / q

9. © 2007 Pearson Addison-Wesley. All rights reserved.7–9 Table 7.3 Bundles of Labor and Capital That Cost the Firm $100

10. © 2007 Pearson Addison-Wesley. All rights reserved.7–10 Figure 7.4 A Family of Isocost 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

11. © 2007 Pearson Addison-Wesley. All rights reserved.7–11 Figure 7.5 Cost Minimization y x z 11650240 L, Units of labor per hour 100 303 28 q = 100 isoquant $3,000 isocost $2,000 isocost $1,000 isocost

12. © 2007 Pearson Addison-Wesley. All rights reserved.7–12 Figure 7.6 Change in Factor Price v x 77500 L, Workers per hour 100 52 q = 100 isoquant Original isocost, $2,000 New isocost, $1,032

13. © 2007 Pearson Addison-Wesley. All rights reserved.7–13 Page 199 Solved Problem 7.3 0138 L, Workers per day Wafer-handling stepper 200 ten-layer chips per day isoquant Stepper Aligner C 1 isocost C 2 C 3

14. © 2007 Pearson Addison-Wesley. All rights reserved.7–14 Figure 7.7 Expansion Path and Long-Run Cost Curve x y z 10075500L,Workers per hour 150 200 100 Expansion path (a) Expansion Path $3,000 isocost $2,000 isocost $4,000 isocost 100 isoquant 150 isoquant 200 isoquant

15. © 2007 Pearson Addison-Wesley. All rights reserved.7–15 Figure 7.7 Expansion Path and Long-Run Cost Curve (cont’d) X Y Z 0q, Units per hour 4,000 3,000 2,000 Long-run cost curve (b) Long-Run Cost Curve 200100150

16. © 2007 Pearson Addison-Wesley. All rights reserved.7–16 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 andAverage Cost Curves

17. © 2007 Pearson Addison-Wesley. All rights reserved.7–17 Table 7.4 Returns to Scale and Long-Run Costs

18. © 2007 Pearson Addison-Wesley. All rights reserved.7–18 Table 7.5 Shape of Average Cost Curves in Canadian Manufacturing

19. © 2007 Pearson Addison-Wesley. All rights reserved.7–19 Application (Page 205) 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

20. © 2007 Pearson Addison-Wesley. All rights reserved.7–20 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

21. © 2007 Pearson Addison-Wesley. All rights reserved.7–21 Application (Page 208) Long-Run Cost Curves in Furniture Manufacturing and Oil Pipelines 2006001,200 q, Furniture per hour 0 20 30 40 10 SRAC 1 SRMC 1 SRAC 2 SRMC 2 LRAC = LRMC

22. © 2007 Pearson Addison-Wesley. All rights reserved.7–22 Application (Page 209) Long-Run Cost Curves in Furniture Manufacturing and Oil Pipelines 200010004002001020401000 Thousand barrels per day (log scale) 150 100 50 10 8 " SRAC 10 " SRAC 16 " SRAC 12 " SRAC 26 " SRAC 20 " SRAC 40 " SRAC LRAC

23. © 2007 Pearson Addison-Wesley. All rights reserved.7–23 Application (Page 210) Choosing an Ink-Jet or a Laser Printer 0 20 10 4 2,5005,000 q, pages SRAC of laser printer SRAC of ink-jet printer LRAC

24. © 2007 Pearson Addison-Wesley. All rights reserved.7–24 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 $4,000 $2,000 L, Workers per day0 100 200

25. © 2007 Pearson Addison-Wesley. All rights reserved.7–25 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 q 2 q 3 AC 3 AC 2 AC 1 q 1 250100150200500 C-141 planes (a) Learning by Doing on C-141 Aircraft 500 400 300 200 100 Average labor cost

26. © 2007 Pearson Addison-Wesley. All rights reserved.7–26 Figure 7.12 Joint Production PPF 2 1 64 Wild strawberries, Pints per day 8 6 0