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notes_2150a_Ch7_part2.docx

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Department
Economics
Course
Economics 2150A/B
Professor
Prof
Semester
Fall

Description
Page1B Shortrun cost minimizationKTreat K as fixed and L as variableTCVCFCNote VCwL KFCrKFirm chooses L the variable input to min TC wLrLKSubject to fLQThe FC is just a constant so it drops out when we are trying to find the optimal L by taking first derivative of and setting0 to use in the SRGraphically we can see that keeping K fixed in the SR means that the firm will operate at higher TC than minimum cost if it tries to expand output The firm above could operate at C lower TC in the LRHowever in the SR it is stuck at E or B in graph below which has higher TC because it cannot expand its capital from KK1 in the SRIn the LR the firm lowers its total costs by using more K and less LSR stuck at ELRmoves to CAonly output level where LR costminimizing bundle is same as SR costmin bundle
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