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Production Maximization and Cost Minimization

1 University of California, Berkeley Spring 2008 ECON 100A Section 109, 112 Production Maximization and Cost Minimization Recall that in consumer choice we take budget constraint as fixed and move indifference curves to find the optimal point. The analogy of firm/producer/seller choice is a bit different, since a firm is not bounded by a fixed income. The optimization could go in two directions either we maximize Production for a given expenditure amount (cost), or we minimize cost for a given Production quantity. In this handout we show how to proceed with both and show that they give us the same optimal Production cost combination. I. Setting Va r i a b l e s : K, L Production function),(LKFgiven. Prices for K and L r and w are fixed.

Substitute the result from step 3 into the quantity constraint F(; K,L) =F this gives us the optimal quantities of K and L. Plugging these into the cost functionrK +wL gives us the minimized cost. The only difference between product maximization and cost minimization comes in step 4.

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