Lecture 7 - Costs

Question 1

Cost Minimisation

Answer 1

• A firm is a cost minimiser if it produces any given output level y greater than or equal to 0 at smallest possible total cost
• c(y) denotes the firm’s smallest possible total cost for producing y units of output
• c(y) is the firm’s total cost function

Question 1

Iso-cost curve

Answer 1

A curve that contains all of the input bundles that cost the same amount is an iso cost curve

Question 2

Returns to scale

Answer 2

The returns to scale properties of a firm’s techology determine how average production costs change with output level

Question 3

Constant returns to scale

Answer 3

• If a firm’s technology exhibits constant returns to scale then doubling its output level from y’ to 2y’ requires doubling all input levels
• Total production cost doubles
• Average production cost does not change

Question 4

Decreasing returns to scale

Answer 4

• If a firm’s technology exhibits decreasing returns to scale then doubling its output level from y’ to 2y’ requires more than doubling all input levels
• Total production cost more than doubles
• Average production cost increases

Question 5

Increasing returns to scale

Answer 5

• If a firm’s technology exhibits increasing returns to scale then doubling its output level from y’ to 2y’ requires less than doubling all input levels
• Total production cost less than doubles
• Average production cost decreases

Question 6

Average cost

Answer 6

• Average cost increases with y if the firm’s technology exhibits decreasing r.t.s
• Average cost decreases with y if the firm’s technology exhibits increasing r.t.s
• Average cost is constant when the firm’s technology exhibits constant r.t.s

Question 7

Long run

Answer 7

In the LR a firm can vary all of its input levels

Question 8

Short run

Answer 8

• SR total cost exceeds LR total cost except for the output level where the SR input level restriction is the LR input level choice
• This says that the LR total cost curve always has one point in common with any particular SR total cost curve
• A SR total cost curve always has one point in common with the LR total cost curve and is elsewhere higher than the LR total cost curve