范里安微观经济学(第九版)Chapter 7.pptxVIP

Chapter 7 The Cost of Production Topics to be Discussed Cost Minimization Costs in the Short Run and Long Run Measuring Cost: Which Costs Matter? Long-Run Versus Short-Run Cost Curves Cost Minimizing Input Choice How does a firm select inputs to produce a given output at minimum cost? Assumptions Two Inputs: Labor (L) and capital (K) Price of labor: wage rate (w) The price of capital (r) r = depreciation rate + interest rate Or rental rate if not purchasing These are equal in a competitive capital market The Isocost Line The Isocost Line A line showing all combinations of L K that can be purchased for the same cost Total cost of production is sum of firm’s labor cost, wL, and its capital cost, rK: C = wL + rK For each different level of cost, the equation shows another isocost line The Isocost Line Rewriting C as an equation for a straight line: K = C/r - (w/r)L Slope of the isocost: -(w/r) is the ratio of the wage rate to rental cost of capital. This shows the rate at which capital can be substituted for labor with no change in cost Choosing Inputs We will address how to minimize cost for a given level of output by combining isocosts with isoquants We choose the output we wish to produce and then determine how to do that at minimum cost Isoquant is the quantity we wish to produce Isocost is the combination of K and L that gives a set cost Producing a Given Output at Minimum Cost Isocost C2 shows quantity Q1 can be produced with combination K2,L2 or K3,L3. However, both of these are higher cost combinations than K1,L1. Q1 is an isoquant for output Q1. There are three isocost lines, of which 2 are possible choices in which to produce Q1. Input Substitution When an Input Price Change If the price of labor changes, then the slope of the isocost line changes, -(w/r) It now takes a new quantity of labor and capital to produce the output If price of labor increases relative to price of capital, and capital is substituted for labor First-Order Condition How does the i