2008pearsonaddisonwesley.allrightsreserved.ppt

* Minimizing Cost To minimize its cost of producing a given level of output, a firm chooses its inputs so that the marginal rate of technical substitution equals the negative of the relative input prices. (7.9) Because MRTS = - MPL/MPK (7.10-11) ? 2008 Pearson Addison Wesley. All rights reserved. 7-* Using Calculus to Minimize Cost Formally, the firm is minimizing its cost subject to the information in the production function contained in the isoquant expression. The corresponding Lagrangian problem is shown in Equation (7.12). Equation 7.12 ? 2008 Pearson Addison Wesley. All rights reserved. 7-* Using Calculus to Minimize Cost Assuming that we have an interior solution, the first-order conditions are: (7.13) (7.14) (7.15) ? 2008 Pearson Addison Wesley. All rights reserved. 7-* Using Calculus to Minimize Cost Dividing Equation 7.13 by Equation 7.14 and rearranging terms, we obtain: (7.16) ? 2008 Pearson Addison Wesley. All rights reserved. 7-* Maximizing Output We could equivalently examine the dual problem of maximizing output for a given level of cost. Here the Lagrangian problem is: (7.17) ? 2008 Pearson Addison Wesley. All rights reserved. 7-* Maximizing Output Assuming that we have an interior solution where both L and K are positive, the first-order conditions are: (7.18) (7.19)