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Eco Analysis

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Submitted By jessiesb
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Economic Analysis of the Firm –
February 1, 2011

• Remember: our big picture objective is… a. To derive cost functions that, ultimately, we can combine with revenue functions to derive profit functions, in order to try and characterize the optimal behavior of the firm. b. Behavior of the average is driven by the marginal on the general production process i. Note how things appear in the Cobb-Douglas world 1. There is no specialization c. The SRPF is upward sloping everywhere. And, the slope of the SRPF is decreasing everywhere. Since the slope is the MPL, it follows that the MPL is decreasing everywhere. d. A derivative is interpreted as a slope. So, if we take the derivative of the SRPF and confirm its positive, we can also take the derivative of the MPL function and confirm its negative. • In deriving cost functions from SRPF… a. Just as we have fixed and variable inputs, it follows that we have fixed and variables costs i. A fixed cost is a cost that doesn’t change regardless of how many outputs (ie: rent, insurance, telephone bills etc…). That is, it is independent of the level of production. In our production setting, fixed costs must be associated with fixed input (K) ii. A variable cost is a cost that varies with the level of production. In our setting, it is associated with Labor. b. That is, to produce more output, increase more variable input aka labor (assuming that labor does not shirk). Since the price of labor (PL) is greater than zero, it follows that labor costs will rise as output rises. • There are 7 short-run production costs: 1. Total fixed costs (TFC) = Pk * K ( graphed as a straight horizontal line 2. Total variable costs (TVC) = PL * L a. To derive the TVC curve, we use the short-run production functions (which relate the

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