Week 4-Cost Minimization and Profit Maximization Part a 1. What is cconomic cost

Question

Week 4-Cost Minimization and Profit Maximization Part a 1. What is cconomic cost? How is it different from accounting cost? 2. What is sunk cost? What is the difference between the fixed cost and a sunk cost? 3. What do we mean by a cost function Suppose a short-run total cost function is given by C-100+500 2+Q (a) Find out the fixed cost, variable cost, marginal cost, average variable cost and average total cost b) Plot them in a diagram and interpret the relationship between average and marginal cost . Prove that, in the short-run, APt and AVC are inversely related. Similarly, MP and MC are inversely related 6. Suppose the production function is given by Q 2LtKt, price of labor(w)s 2 and price of capital (r)-3. The market price for the output produced is P = 6. Answer parts a(i)-a(w) and b (i) to be) based on this information. (a) Short-run production: i. Suppose capital is fixed at K = 27, Write down this firm's SHORT-RUN cost minimization problem. [Note: Capital is fixed here, so the firm chooses only labor to minimize cost. ii. Solve the short-run cot minimization problem to get the short-run cost function C(O) IR-2 Find out the short-run cost of the firm for producing 60 units of output

Explanation / Answer

1.The implicits costs incurred by a firm or individual refers to the economic cost. These costs are the forgone costs that are not recorded financially and not objectively measured. For example, using a land for own use and not give it for rent, so here the rent forgone is economic cost. Accounting cost is different from economic cost, as accounting costs are explicit. These are the cost incurred directly such as paying for raw materials, etc. Also the accounting costs are recorded in financial statements.

2. The sunk cost refers to the cost incurred by the individual or firm which is not recoverable. These cost do no depend on future events. On the other hand fixed costs are the costs incurred by the individual or firm when starting a business such as cost of purchasing furniture, equipmnents, etc. But here there is a chance of recovery, as individual or firm might sell the equipments at purchase price. So it is said that "Not all fixed costs are sunk costs".

3.The cost function is the combination of output quantity and input price. The cost function shows the cost of making the final output by considering the price of input employed to make that quantity.

4.Here the cost function, C= 100+50Q0.2+Q2

a) The fixed cost is 100 as it is not attached with any variable.

The variable cost is 50Q0.2+Q2 as it attached with variable Q.

The marginal cost is the derivative of total cost function which will be (0.2)50Q-0.8+2Q.

The average total cost is total cost divide by quantity, i.e. 100/Q + 50Q0.2/Q +Q2/Q

The average variable cost is variable cost divide by quantity, i.e. 50Q0.2/Q +Q2/Q

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