Chapter 8 Cost Functions Done

Chapter 8. Costs Functions The economic cost of an input is the minimum payment required to keep the input in its present employment. It is the payment the input would receive in its best alternative employment. This cost concept is closely related to the opportunity cost concept (not talking about accounting costs). We usually assume that inputs are hired in perfectly competitive markets. The firm can get all the input it wants without affecting prices. The supply curve for an input is horizontal at the prevailing price. w Supply of the input = price of the input. Firm's demand for the input L. Total cost , Revenue, and Profit Total cost = C = wL + vK (with only 2. inputs, capital and labor). TR = pq (with only 1 output). Then, economic profit is: pq wL vK pf (K, L) wL vK. Thus, economic profit is simply a function of K and L, given that all prices (p, w, and v) and technology are fixed. cost Minimizing Input Choices (for given q). Assume for now that output has been determined to be q0 and the firm wishes to minimize its cost .

Chapter 8 Costs Functions The economic cost of an input is the minimum payment required to keep the input in its present employment. It is the

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