Economics 2150A/B Lecture Notes - Lecture 7: Isocost
22 Jun 2018
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Chapter 7: Costs and Cost Minimization
Cost minimization problem: finding the input combination that minimizes a firm’s total cost of
producing a particular level of output
Cost minimization firm: A firm that seeks to minimize the cost of producing a given amount of output
Isocost Line: represents a set of combinations of labor and capital that have the same total costs (TC)
for the firm. An isocost line is analogous to a budget line from ‘The theory of Consumer Choice.’
oConsider, for example, a case in which w = 10 per labor-hour, r = 20 per machine-hour, and TC
= $1 million per year. The $1 million isocost line is described by the equation
1,000,000 = 10L + 20K which can be rewritten as K = 1,000,000/20 − (10/20)L.
oThe $2 million and $3 million isocost lines have similar equations:
K = 2,000,000/20 − (10/20)L and
K = 3,000,000/20 − (10/20)L
oMore generally, for an arbitrary level of total cost TC, and
input prices w and r, the equation of the isocost line is
oEquation : K = TC/r − (w/r)L.
oSlope : - w/r
Short-Run Cost Minimization
oTotal Variable Costs: The sum of the total expenditures on variable inputs, such as labor and
materials, at the short-run cost-minimizing input combination
Variable and nonsunk
oTotal Fixed costs: The cost of fixed inputs; it does not vary with output
Fixed and nonsunk
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Document Summary
Cost minimization problem: finding the input combination that minimizes a firm"s total cost of producing a particular level of output. Cost minimization firm: a firm that seeks to minimize the cost of producing a given amount of output. Isocost line: represents a set of combinations of labor and capital that have the same total costs (tc) for the firm. An isocost line is analogous to a budget line from the theory of consumer choice. ": consider, for example, a case in which w = 10 per labor-hour, r = 20 per machine-hour, and tc. The million isocost line is described by the equation. 1,000,000 = 10l + 20k which can be rewritten as k = 1,000,000/20 (10/20)l: the million and million isocost lines have similar equations: Short-run cost minimization: total variable costs: the sum of the total expenditures on variable inputs, such as labor and materials, at the short-run cost-minimizing input combination.
