S1 - costs and revenues

Question 1

what is cost function

Answer 1

for given input prices, different isoquants will entail different production costs, allowing for optimal substitution between capital and labour
Each isoquant corresponds to a different level of output and the isocost line tangent to it identifies the cost minimising input mix
Cost function denotes cost to the firm of producing isoquant Q in the cost minimising fashion

Question 2

what is long and short run cost function

Answer 2

Short run = FC + VC
Short run cos function defines the minimum possible cost of producing each output level when variable factors are employed in cost minimising fashion
Long run = all cost care variable
MC = change in C / change in Q

Question 3

what is the classic short run costs graph

Answer 3

assumes that marginal costs fall as output increases but eventually reaches a point where it becomes increasingly costly to make additional outputs and MC rises pulling up the TC curve
AVC at any point of the VC curve = slope pf the relevant ray from the origin
MC = slope of the TC curve and flattest part = min MC point

Question 4

what is the relationship between average and marginal costs

Answer 4

MC(Q) < AC(Q) average cost declines as output increases
MC(Q) > AC(Q) average cost rises as output increases
MC(Q) = AC(Q) average cost is at its minimum

Question 5

what is the cubic cost function

Answer 5

C(Q) = FC + aQ + bQ^2 + cQ^3
Marginal cost is the derivative: MC(Q) = a +2bQ + 3cQ^2

Question 6

what is the quadratic and linear cost function

Answer 6

Quadratic cost function
C(Q) = FC + aQ + bQ^2

Linear cost function
C(Q) = FC + aQ

Question 7

what is the long run costs curve

Answer 7

curve defines minimum average cost of producing alternative levels of output allowing for optimal selection of both fixed and variable factors of production
SRATC curves for different plant sizes

Question 8

what is minimum efficient scale

Answer 8

reached when average costs are minimised
When MC = AC

Question 9

what is economies of scale, diseconomies and constant returns

Answer 9

portion of the long run average cost curve where long run average costs decline as output increases
Diseconomies of sale - portion of the long run average cost curve where long run average costs increase as output increases
Constant returns to scale - portion of the long run average cost curve that remains constant as output increases

Question 10

what is profit maximising

Answer 10

SRTC curve and revenue function for a price taker
Perfect competition - limited power to alter price