Chapter 7 Costs. © 2004 Pearson Addison-Wesley. All rights reserved7-2 Table 7.1 Variation of Short-Run Cost with Output

Chapter 7

Costs

© 2004 Pearson Addison-Wesley. All rights reserved 7-2

Table 7.1 Variation of Short-Run Cost with Output

© 2004 Pearson Addison-Wesley. All rights reserved

Figure 7.1 Short-Run Cost Curve

120

216

400

48

0 6 10

10

42 8Quantity, q , Units per day

Quantity, q, Units per day6

b

a

B

A

42 8

C

F

1

1

27

20

VC

MC

AC

AVC

AFC

(a)

(b)

60

2827

20

8

0

Cos

t, S

Cos

t per

uni

t, $


Figure 7.2 Variable Cost and Total Product of Labor

24120

46230

20100

525

77385

Total product of labor,Variable cost

L, Hours of labor per dayVC = wL, Variable cost, $

0

5

1

6

10

13Q

uant

ity, q

, Uni

ts p

er d

ay


Application (Page 194) Short-Run Cost Curves for a Printing Firm

100 200 300

q, Units per year

AFC

AVCAC

MC

0

20

30

40

50

10

Cos

t, kr

oner


Table 7.2 Effect of a Specific Tax of $10 per Unit on Short-Run Costs


Figure 7.3 Effect of a Specific Tax on Cost Curves

155 8 100

q, Units per day

80

37

27

$10

$10ACa = ACb + 10

ACb

MCb

MCa = MCb + 10

Cos

ts p

er u

nit,

$


Page 197 Solved Problem 7.1

/q

q, Units per day

AC b

qa

MC

qb

AC a = AC b + /q

Cos

ts p

er u

nit,

$


Table 7.3 Bundles of Labor and Capital that Cost the Firm $100


Figure 7.4 A Family of Isoquant Lines

a

b

d

e

c

$150 isocost$100 isocost$50 isocost

$100———$5

= 20$150———$5

= 30$50———$5

= 10

$100———$10

10 =

$50———$10

5 =

$150———$10

15 =

L, Units of labor per year

K, U

nits

of c

apita

l per

yea

r


Figure 7.5 Cost Minimization

y

x

z

11650240

L, Units of labor per year

100

303

28

q = 100 isoquant

3,000-krisocost

2,000-krisocost

1,000-krisocost

K,

Uni

ts o

f ca

pita

l per

yea

r


Application (Page 205) Rice Milling on Java

50403020100

L, Workers per year

80

70

60

50

40

30

20

10

Large bulk facility

Small bulk facility

Large rice mill

Small rice mill

Hand poundingIsoquant

C 2 isocost C1 isocost

K, U

nits

of c

apita

l per

yea

r


Figure 7.6 Change in Factor Price

v

x

77500 L, Workers per year

100

52

q = 100 isoquant

Originalisocost,2,000 kr

New isocost,1,032 kr

K,

Uni

ts o

f ca

pita

l per

yea

r

Figure 7.7 Expansion Path and Long-Run Cost Curve

x

y

z


150

200

100

Expansion path

(a) Expansion Path

3,000-krisocost

2,000-krisocost

4,000-kr isocost

100 isoquant

150 isoquant

200 isoquant

X

Y

Z

0 q, Units per year

4,000

3,000

2,000

Long-run cost curve

(b) Long-Run Cost Curve

200100 150

K, U

nits

of c

apita

l per

yea

r

C, C

ost,

kron

er

Figure 7.7a Expansion Path and Long-Run Cost Curve

x

y

z


150

200

100

Expansion path

(a) Expansion Path

3,000-krisocost

2,000-krisocost

4,000-kr isocost

100 isoquant

150 isoquant

200 isoquant

K,

Un

its o

f ca

pita

l pe

r ye

ar


Figure 7.7b Expansion Path and Long-Run Cost Curve

X

Y

Z

0 q, Units per year

4,000

3,000

2,000

Long-run cost curve

(b) Long-Run Cost Curve

200100 150

C,

Co

st,

kro

ne

r


Figure 7.8 Long-Run Cost Curves

q* q, Quantity per day

(a) Cost Curve

C

q* q, Quantity per day

MC

AC

(b) Marginal and Average Cost Curves

Co

st,

SC

ost

pe

r u

nit,

$


Table 7.4 Returns to Scale and Long-Run Costs


Table 7.5 Shape of Average Cost Curves in Canadian Manufacturing


Application (Page 213) Average Cost of Cement Firms

3.0 3.32.01.0 2.51.50.5

AC

q, Cement, million tons per year

7

6

5

4

0

Ave

rage

cos

t, £


Figure 7.9 Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves

a

bd

e

SRAC1 SRAC 2SRAC 3

SRAC 3LRAC

c

q2q1 q, Output per day

10

0

12

Ave

rag

e c

ost

, $


Application (Page 216) Printing Firm

200 600 1,200

q, Output per year

0

20

30

40

10

SRAC 1

SRMC1

SRAC 2

SRMC 2

LRAC = LRMC

Co

st,

kro

ne

r


Application (Page 217) Oil Pipelines

2000100040020010 20 40 1000

Thousand barrels per day

150

100

50

10

8" SRAC

10" SRAC

16" SRAC

12" SRAC

26" SRAC20" SRAC

40" SRAC

LRAC

Cos

t pe

r ba

rrel

mile


Application (Page 218) Choosing an Ink-Jet or a Laser Printer

4,0002,000 6,000 8,0000

q, Pages

7

8

9

10

11

12

13SRAC of laser printer

SRAC of ink-jet printer

LRAC

Cen

ts p

er p

age


Figure 7.10 Long-Run and Short-Run Expansion Paths

100

x y

z

50 159

Long-run expansion path

200 isoquant

100 isoquant

Short-runexpansion path

4,616 kr

4,000 kr

2,000 kr

L, Workers per year0

100

200

K,

Cap

ital p

er y

ear


Figure 7.11 Learning by Doing

A

BC

b

c

q, Output per period

(b) Economies of Scale and Learning by Doing

Learning by Doing

Economies of scale

250100 150 200500

C-141 planes

(a) Learning by Doing on C-141 Aircraft

500

400

300

200

100

Average labor cost

q2 q3

AC3

AC2

AC1

q1

La

bo

r co

sts

pe

r p

lan

eA

vera

ge

co

st,

$


Figure 7.11a Learning by Doing

250100 150 200500

C-141 planes

(a) Learning by Doing on C-141 Aircraft

500

400

300

200

100

Average labor cost

La

bo

r co

sts

pe

r p

lan

e


Figure 7.11b Learning by Doing

A

BC

b

c

q, Output per period

(b) Economies of Scale and Learning by Doing

Learning by Doing

Economies of scale

q2 q3

AC 3

AC 2

AC1

q1

Ave

rag

e c

ost

, $


Figure 7.12 Joint Production

PPF 2

PPF 1

64

Wild strawberries, Pints per day

8

6

0

Mu

shro

om

s, P

ints

pe

r d

ay

Documents

Chapter 7 Costs. © 2004 Pearson Addison-Wesley. All rights reserved7-2 Table 7.1 Variation of Short-Run Cost with Output