ECON 20 Lecture Notes - Lecture 9: Average Variable Cost, Average Cost, Backhoe

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amaranthgrasshopper262

28 Aug 2020

School

Irvine Valley College

Department

Economics

Course

ECON 20

Professor

mcneil

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Document Summary

Production functions with two variable factors of production: in general, additional capital increases the productivity of labor. Because capital- buildings, machines, and so on is of no use without people to operate it, we say that capital and labor are complementary inputs. Yet it is also true that sometimes machines replace labor for certain types of production. So capital and labor can also be substitutes. Ex: guy running a backhoe and you need a backhoe compliments. Ex: guy and shovel or guy with backhoe substitutes. Fixed costs: any cost that does not depend on the firm"s level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run. Same as total fixed costs, overhead, and sunk costs. Variable costs: a cost that depends on the level of production chosen. Total cost (tc): fixed cost plus variable costs tc = fc + vc.

Related Questions

A Cobb-Douglas production function for tables is Q=2K^0.5 L^0.5

a) Can any tables be built without tools?

b) Can the production of tables be mechanized?

c) There are currently 100 units of capital/tools, and in the short run no more tools can be either acquired or sold. What is the short-run production function?

d) If capital/tools rents for $100 per unit per day, and labor can be hired for $200 per unit per day, what are the fixed costs and variable costs? What is the total cost function?

e) What is the average cost function? To minimize average costs, how many tables should be produced?

f) What is the long term (meaning: capital/tool level is flexible) cost-minimizing amount of labor and capital to produce 50 tables?

maroonserval573

1. Theoretically, in a long-run cost function:

a. all inputs are fixed

b. all inputs are considered variable

c. some inputs are always fixed

d. capital and labor are always combined in fixed proportions

2. The short-run cost function is:

a. where all inputs to the production process are variable

b. relevant to decisions in which one or more inputs to the production process are fixed

c. not relevant to optimal pricing and production output decisions

d. crucial in making optimal investment decisions in new production facilities

3. Break-even analysis usually assumes all of the following except:

a. in the short run, there is no distinction between variable and fixed costs.

b. revenue and cost curves are straight-lines throughout the analysis.

c. there appears to be perfect competition since the price is considered to remain the same regardless of quantity

d. the straight-line cost curve implies that marginal cost is constant.

maroonllama628

You manage a plant that mass-produces engines by teams of workers using assembly

machines. The technology is summarized by the production function

q = 5 KL

where q is the number of engines per week, K is the number of assembly machines, and L

is the number of labor teams. Each assembly machine rents for r = $10,000 per week, and

each team costs w = $5000 per week. Your plant has a fixed installation of 5assembly machines as part of its design.

In the SHORT RUN:

For any given level of output q, write the expression for the number of Labor teams required.

b. What is the cost function for your plant ï¿½ namely, how much would it cost to produce q engines? (Hint: TC=TFC+TVC, TFC=rK, TVC=wL)

c. What are average and marginal costs for producing q engines? How do average costs vary with output?

d. How many Labor teams are required to produce 250 engines? What is the average cost per engine?

In the LONG RUN:

e. You are asked to make recommendations for the design of a new production facility. What capital/labor (K/L) ratio should the new plant accommodate if it wants to minimize the total cost of producing at any level of output q? MPL=5K, MPK=5L.

f. For output q=500, how many L and K should you use in order to minimize cost?

g. What is the minimum cost of production for q=500?

h. What is the minimum cost of product for any output q? (Note: write TC as a function of q).

i. If w is increased to $10,000 per week, how does this change the capital/labor (K/L) ratio if you want to minimize the total cost of production?

j. Given the new wage rate, how many L and K should you use in order to minimize cost for output q=500?

k. Is the expansion path a straight or a curved line? Is it upward or downward sloping? Why?

ECON 20 Lecture Notes - Lecture 9: Average Variable Cost, Average Cost, Backhoe

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