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Chapter 7

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Chapter 7

  1. 1. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University Production and Cost CHAPTER 1© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  2. 2. Production • Profit –Total revenue minus total cost • Business firm –Organization, owned and operated by private individuals –Specializes in production • Production –Process of combining inputs to make goods and services 2 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  3. 3. Production • Technology –Methods available for combining inputs to produce a good or service • Assumption –Production technology –Firm uses only two inputs: capital and labor • Long run –A time horizon long enough for a firm to vary all of its inputs 3 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  4. 4. Production • Variable input –An input whose usage can change over some time period • Fixed input –An input whose quantity must remain constant over some time period • Short run –A time horizon during which at least one of the firm’s inputs cannot be varied 4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  5. 5. Production in the Short Run • Total product –The maximum quantity of output that can be produced from a given combination of inputs –E.g.: maximum output for each number of workers • Total product curve –Horizontal axis: number of workers –Vertical axis: total product 5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  6. 6. Table Short-Run Production at Spotless Car Wash 6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1
  7. 7. Production in the Short Run • Marginal product of labor (MPL= ΔQ/ΔL) –The additional output produced when one more worker is hired –Change in total product (ΔQ) divided by the change in the number of workers employed (ΔL) –Tells us the rise in output produced when one more worker is hired 7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  8. 8. Production in the Short Run • Increasing marginal returns to labor –The marginal product of labor increases as more labor is hired • Diminishing marginal returns to labor –The marginal product of labor decreases as more labor is hired • Law of diminishing (marginal) returns –As we continue to add more of any one input, holding the other inputs constant –Its marginal product will eventually decline 8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  9. 9. Figure Total and Marginal Product 9 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Number of workers Units of output 1 2 3 4 5 6 130 160 184 196 30 90 Total product ΔQ from hiring first worker = 30 ΔQ from hiring second worker = 60 ΔQ from hiring third worker = 40 ΔQ from hiring fourth worker = 30 Increasing marginal returns Diminishing marginal returns
  10. 10. Thinking About Costs • A firm’s total cost –Of producing a given level of output –Is the opportunity cost of the owners • Everything they must give up in order to produce that amount of output • Implicit and explicit costs 10 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  11. 11. Thinking About Costs • Sunk cost –Cost that has been paid or must be paid –Regardless of any future action being considered –Should not be considered when making decisions 11 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  12. 12. Thinking About Costs • Explicit costs –Involve actual payments • Implicit costs –No money changes hands • Forgone rent • Forgone interest • Forgone labor income 12 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  13. 13. Table A Firm’s Costs 13 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2
  14. 14. Thinking About Costs • Least-Cost Rule –A firm produces any given output level using the lowest cost combination of inputs available • Least-cost input combination depends on –Nature of the firm’s technology –Prices the firm must pay for its inputs –Time horizon for the firm’s planning 14 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  15. 15. Cost in the Short Run • Fixed costs –Costs of fixed inputs –Remain constant as output changes • Variable costs –Costs of variable inputs –Change with output 15 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  16. 16. Table Short-Run Costs for Spotless Car Wash 16 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3
  17. 17. Cost in the Short Run • Total fixed cost (TFC) –The cost of all inputs that are fixed in the short run • Total variable cost (TVC) –The cost of all variable inputs used in producing a particular level of output • Total cost (TC = TFC + TVC) –The costs of all inputs, fixed and variable, used to produce a given output level in the short run 17 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  18. 18. Figure At any level of output, total cost (TC) is the sum of total fixed cost (TFC) and total variable cost (TVC) The Firm’s Total Cost Curves 18 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Units of Output Dollars 30 18490 130 160 510 630 750 $870 270 390 TC TVC TFC TFC = $150
  19. 19. Cost in the Short Run • Average fixed cost (AFC = TFC / Q) –Total fixed cost divided by the quantity of output produced • Average variable cost (AVC = TVC / Q) –Total variable cost divided by the quantity of output produced • Average total cost (ATC = TC / Q) –Total cost divided by the quantity of output produced 19 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  20. 20. Cost in the Short Run • Marginal cost (MC = ΔTC / ΔQ) –The increase in total cost from producing one more unit of output –It tells us how much cost rises per unit increase in output 20 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  21. 21. Figure Average variable cost (AVC) and average total cost (ATC) are U- shaped, first decreasing and then increasing. Average fixed cost (AFC), the vertical distance between ATC and AVC, becomes smaller as output increases. The marginal cost (MC) curve is also U-shaped, reflecting first increasing and then diminishing marginal returns to labor. MC passes through the minimum points of both the AVC and ATC curves. Average and Marginal Costs 21 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Units of Output Dollars 30 18490 130 160 2 196 4 6 8 $10 AFC ATC AVC MC
  22. 22. Cost in the Short Run • Explaining the shape of the MC curve –When the marginal product of labor (MPL) rises, marginal cost (MC) falls –When MPL falls, MC rises –Since MPL ordinarily rises and then falls, MC will do the opposite –MC curve is U-shaped • Increasing then diminishing marginal returns to labor 22 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  23. 23. Table Average and Marginal Test Scores 23 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3
  24. 24. Cost in the Short Run • ATC curve is U-shaped –Because AFC decreases and AVC first decreases, then increases –At low levels of output, AVC and AFC are both falling, so the ATC curve slopes downward –At higher levels of output, rising AVC overcomes falling AFC, and the ATC curve slopes upward 24 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  25. 25. Cost in the Short Run • AVC curve is U-shaped –Because MC curve is U-shaped (increasing and then diminishing returns to labor) • MC curve –Crosses both the AVC curve and the ATC curve at their respective minimum points 25 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  26. 26. Production and Cost in the Long Run • In the long run –No fixed inputs; no fixed costs –All inputs and all costs are variable • Output production –Least-cost rule • Long-run total cost (LRTC) –Cost of producing each quantity of output when all inputs are variable and the least- cost input mix is chosen 26 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  27. 27. Production and Cost in the Long Run • Long-run average total cost (LRATC = LRTC / Q) –Cost per unit of producing each quantity of output, in the long run, when all inputs are variable –Long-run total cost divided by quantity • Relationship between long-run and short- run costs –LRTC ≤ TC –LRATC ≤ ATC 27 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  28. 28. Table Four Ways to Wash 196 Cars per Day 28 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5
  29. 29. Table Long-Run Costs for Spotless Car Wash 29 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6
  30. 30. Production and Cost in the Long Run • Plant –The collection of fixed inputs at a firm’s disposal • Size of the firm’s plant –Can be changed in the long run –Cannot be changed in the short run 30 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  31. 31. Production and Cost in the Long Run • A firm’s LRATC curve –Combines portions of each ATC curve available to the firm in the long run –For each output level, the firm will always choose to operate on the ATC curve with the lowest possible cost 31 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  32. 32. Production and Cost in the Long Run • In the short run –A firm can only move along its current ATC curve • In the long run –A firm can move from one ATC curve to another • By varying the size of its plant • Moving along its LRATC curve 32 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  33. 33. Figure Average-total cost curves ATC0, ATC1, ATC2, and ATC3 show average costs when the firm has zero, one, two, and three automated lines, respectively. The LRATC curve combines portions of all the firm’s ATC curves. In the long run, the firm will choose the lowest-cost ATC curve for each level of output. Long-Run Average Total Cost 33 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Use 0 automated lines 90 1300 Units of Output Dollars $8.00 $6.00 $4.00 $2.00 30 175 184 250 300 ATC1ATC0 ATC2 ATC3 A B C E D Use 1 automated lines Use 2 automated lines Use 3 automated lines LRATC
  34. 34. Production and Cost in the Long Run • The U-shape of the LRATC curve: –As output increases, long-run average costs: –First decline (economies of scale) –Then remain constant (constant returns to scale) –And finally rise (diseconomies of scale) 34 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  35. 35. Production and Cost in the Long Run • Economies of scale –Long-run average total cost decreases as output increases –LRATC curve slopes downward –Long-run total cost rises proportionately less than output • Causes for economies of scale –Gains from specialization –Spreading costs of lumpy inputs 35 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  36. 36. Production and Cost in the Long Run • Lumpy input –An input whose quantity cannot be increased gradually as output increases –But must instead be adjusted in large jumps 36 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  37. 37. Production and Cost in the Long Run • Diseconomies of scale –Long-run average total cost increases as output increases –LRATC curve slopes upward –Long-run total cost rises more than in proportion to output 37 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  38. 38. Production and Cost in the Long Run • Constant returns to scale –Long-run average total cost is unchanged as output increases –LRATC curve is flat –Both output and long-run total cost rise by the same proportion 38 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  39. 39. Figure If long-run total cost rises proportionately less than output, production reflects economies of scale, and LRATC slopes downward. If cost rises proportionately more than output, there are diseconomies of scale, and LRATC slopes upward. Between those regions, cost and output rise proportionately, yielding constant returns to scale. The lowest output level at which the LRATC hits bottom is the firm’s minimum efficient scale. The Shape of LRATC 39 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Pizzas Served per Day Dollars 200 250 $8.00 0 $6.00 $4.00 $2.00 LRATC Economies of Scale Diseconomies of Scale Constant Returns to Scale Minimum efficient scale (MES)
  40. 40. Production and Cost in the Long Run • Minimum efficient scale (MES) –The lowest output level at which the firm’s LRATC curve hits bottom –Tells us how large a firm must grow in order to fully exploit economies of scale • Firms that grow to their MES –Have a cost advantage over other firms that operate at smaller output levels 40 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  41. 41. Table Types of Costs 41 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Term Symbol/Formula Definition Costs in general Explicit cost Implicit cost Sunk cost Lumpy input cost Short-run costs Total fixed cost Total variable cost Total cost Average fixed cost Average variable cost Average total cost Marginal cost Long-run costs Long-run total cost Long-run average total cost TFC TVC TC=TFC+TVC AFC = TFC/Q AVC = TVC/Q ATC = TC/Q MC=ΔTC/ΔQ LRTC LRATC=LRTC/Q An opportunity cost where an actual payment is made An opportunity cost, but no actual payment is made An irrelevant cost because it cannot be affected by any current or future decision The cost of an input that can only be adjusted in large, indivisible amounts The cost of all inputs that are fixed (cannot be adjusted) in the short run The cost of all inputs that are variable (can be adjusted) in the short run The cost of all inputs in the short run The cost of all fixed inputs per unit of output The cost of all variable inputs per unit of output The cost of all inputs per unit of output The change in total cost for each one-unit rise in output The cost of all inputs in the long run Cost per unit in the long run
  42. 42. The Urge to Merge • When there are significant, unexploited economies of scale –Because the market has too many firms for each to operate near its minimum efficient scale –Mergers often follow 42 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  43. 43. Figure With market quantity demanded fixed at 60,000, and six firms of equal market share, each operates at point A, producing 10,000 units at $200 per unit. But any one firm can cut price slightly, increase market share, and operate with lower cost per unit, such as at the MES (point B). Other firms must match the first- mover’s price; otherwise they lose market share and end up at .a point like C, with higher cost per unit than originally. The result is a price war, with each firm ending up back at point A, only now—due to the lower price—they suffer losses. A series of mergers to create three large firms would enable each to operate at its MES (point B), with less likelihood of price wars and losses. LRATC for a Typical Firm in a Merger-Prone Industry 43 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Quantity per Month Dollars 8,000 10,000 20,000 80 200 $240 LRATC Original Output Level MES A B C
  44. 44. Isoquant Analysis: Finding the Least-Cost Input Mix • Every point on an isoquant –Input mix that produces the same quantity of output –An increase in one input requires a decrease in the other input to keep total production unchanged • Isoquants –Always slope downward 44 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  45. 45. Isoquant Analysis • Higher isoquants –Greater levels of output than lower isoquants • Marginal rate of technical substitution –The (absolute value of the) slope of an isoquant –Measures the rate at which a firm can substitute one input for another while keeping output constant 45 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  46. 46. Isoquant Analysis • Move rightward along any given isoquant –Marginal rate of technical substitution (MRTS) decreases • Slope of the isoquant (MRTSL,N) • With land measured horizontally • And labor measured vertically –MRTSL,N is the ratio of the marginal products, MPN/MPL 46 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  47. 47. Isoquant Analysis • An isoquant –Becomes flatter as we move rightward –The MPN decreases, while the MPL increases –The ratio (MPN/MPL) decreases 47 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  48. 48. Table Production Technology for an Artichoke Farm 48 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.1
  49. 49. Figure Each of the curves in the figure is an isoquant, showing all combinations of labor and land that can produce a given output level. The middle curve, for example, shows that 4,000 units of output can be produced with 11 workers and 3 hectares of land (point B), with 5 workers and 5 hectares of land (point C), as well as other combinations of labor and land. Each isoquant is drawn for a different level of output. The higher the isoquant line, the greater the level of output. An Isoquant Map 49 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.1 10 8 Land (hectares) Labor (workers) 2 4 6 80 10 12 14 16 18 2 4 6 12 14 16 18 20 22 Q=2,000 Q=6,000 F Q=4,000 C B A
  50. 50. Isocost Lines • Isocost lines always slope downward –If you use more of one input, you must use less of the other input in order to keep your total cost unchanged • Slope of an isocost line: - PN /PL • With land (N) on the horizontal axis and labor (L) on the vertical axis • Remains constant as we move along the line • Higher isocost lines –Greater total costs for the firm 50 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  51. 51. Figure Each of the lines in the figure is an isocost line, showing all combinations of labor and land that have the same total cost. The middle line, for example, shows that total cost will be $7,500 if 9 workers and 3 hectares of land are used (point C). All other combinations of land and labor on the middle line have the same total cost of $7,500. Each isocost line is drawn for a different value of total cost. The higher the isocost line, the greater is total cost. Isocost Lines 51 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.2 10 9 Land (hectares) Labor (workers) 3 5 7.5 10 12 15 20 TC=$10,000 TC=$7,500 TC=$5,000 C
  52. 52. The Least-Cost Input Combination • Least-cost input combination –Of two inputs (L, N) for producing any level of output • Is found at the point where an isocost line is tangent to the isoquant for that output level • The firm’s MRTS between the two inputs (MPN/MPL) will equal the ratio of input prices (PN /PL) • The marginal product per dollar of land (MPN/PN) must equal the marginal product per dollar of labor (MPL/PL) 52 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  53. 53. Figure To produce any given level of output at the least possible cost, the firm should use the input combination where the isoquant for that output level is tangent to an isocost line. In the figure, the input combinations at points J, C, and K can all be used to produce 4,000 units of output. But the combination at point C (5 workers and 5 hectares of land), where the isoquant is tangent to the isocost line, is the least expensive input combination for that output level. The Least-Cost Input Combination for a Given Output Level 53 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.3 10 5 Land (hectares) Labor (workers) 3 5 7.5 10 15 20 TC=$10,000 TC=$5,000 Q=4,000 TC=$7,500 J K C
  54. 54. The Least-Cost Input Combination • Least-cost input mix with many variable inputs –Marginal product per dollar of any input is equal to marginal product per dollar of any other input 54 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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