Costs to Firms

Question 1

What is the Short Run Production Function?

Answer 1

• Q=F(K,L)
• K = K bar

Question 2

What is the Total Costs in the Short Run (derived from Production function)

Answer 2

• TC = rK + wL
• K = K bar
• rK is the fixed costs
• wL is the variable costs

Question 3

What curve is the Total cost curve derived from

Answer 3

• The Labour curve, given the quantity produced (Inverse of Production Function)

Question 4

What is the gradient of each cost curve equal to?

Answer 4

• TVC = TC = Marginal Cost
• TFC = 0

Question 5

At what point does AVC and ATC cut the MC curve?

Answer 5

• The minimum point of the AVC and ATC curves contacts the Marginal Cost curve

Question 6

What is the equation for the input combinations in the Long Run?

Answer 6

• Co = rKo + wLo
• No fixed costs now

Question 7

Because there are now three variable factors, what must we construct?

Answer 7

• An isocost curve

Question 8

What is the general formula for the Cost line?

Answer 8

• K = Co/r - (w/r x L)
• y = a + b x

Question 9

To maximise Profit/Production, what equation must hold (w.r.t costs)?

Answer 9

• |w/r| = |MRTS|(MPL / MPK)
• Rewritten as:
  r/MPK = w/MPL
• This is the best outcome

Question 10

For expansions/reduction in production/costs will change combinations in labour and capital. What is the expected line that tells use the best outcome?

Answer 10

• The Optimal Expansion Path