Cost Minimization

Question 1

What is a cost function?

Answer 1

the minimum costs necessary to achieve the desired level of output — will depend on w1, w2, and y, so we write it as c(w1, w2, y)

Question 2

What is an isocost line?

Answer 2

It represents a combination of inputs which all cost the same amount.

Question 3

What is cost minimization?

Answer 3

The choice of factors that minimize production costs can be determined by finding the point on the isoquant that has the lowest associated isocost curve

Question 4

What is “derived factor demands”?

Answer 4

They measure the relationship between the prices and output and the optimal factor choice of the firm, conditional on the firm producing a given level of output, y.

Question 5

What is another word for “derived factor demands”?

Answer 5

Conditional Factor Demand Functions?

Question 6

What is the difference between Conditional factor demands and Profit-maximizing factor demands?

Answer 6

The conditional factor demands give the cost-minimizing choices for a given level of output; the profit-maximizing factor demands give the profit-maximizing choices for a given price of output.

Question 7

What major concern does Conditional Factor demands address?

Answer 7

They answer the question of how much of each factor would the firm use if it wanted to produce a given level of output in the cheapest way

Question 8

What is Weak Axiom of Cost Minimization (WACM)?

Answer 8

If the firm is always choosing the cost-minimizing way to produce y units of output, then its choices at times t and s must satisfy these inequalities.

Question 9

What is the unit cost function?

Answer 9

Cost of producing 1 unit of output, c(w1, w2, 1)y.

Question 10

What is the cheapest way to produce y units of output?

Answer 10

We just use y times as much of every input as we were using to produce 1 unit of output

Question 11

What is the average cost function?

Answer 11

The average cost function is simply the cost per unit to produce y units of output

Question 12

What is the short-run cost function?

Answer 12

The short-run cost function is defined as the minimum cost to produce a given level of output, only adjusting the variable factors of production

Question 13

What is the long-run cost function?

Answer 13

The long-run cost function gives the minimum cost of producing a given level of output, adjusting all of the factors of production.

Question 14

What are Fixed costs associated with?

Answer 14

are costs associated with the fixed factors: they are independent of the level of output, and, in particular, they must be paid whether or not the firm produces output

Question 15

What are Quasi-fixed costs, in this function?

Answer 15

are costs that are also independent of the level of output, but only need to be paid if the firm produces a positive amount of output.

Question 16

Important lesson for fixed costs

Answer 16

If it is necessary to spend a fixed amount of money before any output at all can be produced, then quasi-fixed costs will be present.

Question 17

What are sunk costs?

Answer 17

A payment that is made and cannot be recovered. The cost of buying the furniture, on the other hand, is not entirely sunk, since you can resell the furniture when you are done with it

Question 18

How to control sunk costs?

Answer 18

The best way to keep these issues straight is to make sure to treat all expenditures on a flow basis

Question 19

What is the intimate relationship between the returns to scale?

Answer 19

Increasing returns to scale implies decreasing average cost, decreasing returns to scale implies increasing average cost, and constant returns to scale implies constant av- erage cost.