8 Modelling Costs of Production Flashcards
General cost function for y = KaLb
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How can you get the intercepts of an isocost line?
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What is the slope of an isocost line for c = wL + rK?
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Isocost line on a diagram
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If relative costs are constant but total cost changes, how can we illustrate this?
New isocost line is parallel to the one before.
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What are Output Expansion Paths?
The locus of points at which the isocost and isoquant lines are tangent, following the standard replication argument.
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How can we plot a cost function?
Plot cost against output: c = c(y)
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How can we determine returns to scale from factor demands?
If a + b = 1 then c(y) is linear: CRS
If a + b < 1 then c(y) is convex: DRS
If a + b > 1 then c(y) is convex: IRS
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Define the short run (microeconomics)
A period during which some factor of production is fixed.
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Define average cost + equation
The average cost per unit produced.
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How is average cost calculated diagrammatically?
As the slope of the ray from the origin to the point on the cost function.
Define marginal cost + equation
The effect on total cost of producing one additional unit of output.
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How is marginal cost calculated diagrammatically?
As the slope of the cost function at any given point.
RULES about the relationship between MC and AC
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Define fixed costs + equation
The elements of costs which do not change as output changes. They are short-run phenomena by definition.
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Define variable costs + equation
The elements of costs which change as output changes.
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Equation for average variable cost function
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Equation for average fixed cost function
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Diagram for total costs and variable costs
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Diagram for AC, MC, AFC and AVC
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How can we determine total costs from AC and AVC curves?
As the area (multiplication)
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How do short run costs relate to long run costs?
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