week 9 : cost

Seite 1

TUEDAY

marginal cost = change in TC/change inQ

change in Q = MP

fixed + Variable = total cost

Marginal revenue is the benefit from one additional unit

MR=MC is maximum

THURSDAY

AFC (FC/Q), AVC (VC/Q), ATC (TC/Q) helps to put in a graph

AFC is always decreasing

MC will always eventually increase because of the law of diminishing marginal returns

AVC and ATC will start to increase because MC will eventually be higher than the the average and drag it up

MC intersects AVC and ATC at their minimum points

LONG RUN

price of labor = w (wage)

price of capital = r (rent)

optimal ratio of labor and capital is

MPL/w = MPK/r

additional production from spending $1 on labor is equal to the additional production from spending $1 on capital

--> similar equation to maximizing utility equation, this is the firm version

if not equal, spend more money on the side with a higher number and spend less on the side with smaller number

FIXED COST vs. SUNK COST

Fixed cost: cost that don't depend on quantity of output

rent, salaries

Sunk costs: cost that has already occurred and cannot be changed or recovered

last year's rent

SUNK COSTS SHOULDN"T AFFECT OUR DECISION