Chapter 6

Cost and Choice

Figure 6.1 A Simplified Jam-Making Technology

Figure 6.2 The Cost Function for Our Simplified Jam-Making Technology

Figure 6.3 The Jam-Making Technology

Figure 6.4 Isocost Curves and the Optimal Combination of Inputs

Figure 6.5 Isocosts and Isoquants

Solved Problem 6.2

Machines 1 2 3 4 5 6

1 110 195 235 270 300 310

2 160 235 280 302.5 317.5 3303 200 265 300 317.5 337.5 342.54 230 275 315 335 345 3505 245 300 327.5 342.5 352.5 3556 225 315 332.5 345 355 356

Workers

1) What is the MPl and the MPk at the labor-capital combination (2,2)?2) What is the least-cost way of producing 235 units of output when the price of capital is $1 and the price of labor is $2?

Figure 6.6 A Long-Run Cost Function

Figure 6.7 The Optimal Combination of Inputs in the Short Run

Figure 6.8 The Leontief Production Function

Figure 6.9 Optimal Input Combinations in the Leontief Technology

Figure 6.10 A Cost Function Associated with the Leontief Technology

Figure 6.11 Isoquants Associated with the Cobb-Douglas Technology

Figure 6.12 Cobb-Douglas Production Function

Figure 6.14(a) Long- and Short-Run Production Functions

Figure 6.14(b) Long- and Short-Run Production Functions

Figure 6.15(a) Short-Run Cost Function

Figure 6.16 Some Short-Run Average Cost Curves

Output

Solved Problem 6.6

Suppose it costs eBay $10M to get established. Also suppose it currently has 100,000 auctions occurring. Assume the marginal cost of adding another auction is $40.

1) What is the AC of the 100,000th auction? $140

AFC + AVC

$10M/100,000 + (100,000 x $40)/100,000

2) What is the AC of the 100th auction? $100,040

AFC + AVC

$10M/100 + (100,000 x $40)/100

3) What is the MC of the 100th auction? $40

Figure 6.17 Short-Run Total Cost Functions and a Long-Run Total Cost Function

Figure 6.20 The Relationship between Long-Run and Short-Run Marginal Cost Functions

Short run expansion path

E

Figure 6.21 Long-Run and Short-Run Marginal Costs