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Questions and Answers
What type of cost curves are discussed in the text?
What type of cost curves are discussed in the text?
- U-shaped (correct)
- Exponential
- Bell-shaped
- Linear
How do the AAAA and AAAAAA curves behave as quantity approaches infinity?
How do the AAAA and AAAAAA curves behave as quantity approaches infinity?
- They diverge
- They intersect
- They remain constant
- They converge (correct)
What happens to curve AAAA when MMMM is less than AAAA?
What happens to curve AAAA when MMMM is less than AAAA?
- AAAA increases
- AAAA decreases (correct)
- AAAA reaches its maximum
- AAAA remains unchanged
At what point do curves MMMM and AAAAAA cross each other?
At what point do curves MMMM and AAAAAA cross each other?
What behavior characterizes the shape of the cost curves mentioned in the text?
What behavior characterizes the shape of the cost curves mentioned in the text?
Which curve always lies above another curve based on the information provided?
Which curve always lies above another curve based on the information provided?
What does the cost function represent?
What does the cost function represent?
In the context of variable costs, what does 'VC = f^(-1)(q)' represent?
In the context of variable costs, what does 'VC = f^(-1)(q)' represent?
How are input costs affected if capital and labor prices are assumed to be fixed?
How are input costs affected if capital and labor prices are assumed to be fixed?
What transformation results in obtaining the variable cost curve from the production function?
What transformation results in obtaining the variable cost curve from the production function?
How does the variable cost curve differ from the standard cost curve?
How does the variable cost curve differ from the standard cost curve?
What aspect do the x-axis and y-axis represent in Figure 4.4b?
What aspect do the x-axis and y-axis represent in Figure 4.4b?
What phenomenon is referred to as diminishing marginal cost?
What phenomenon is referred to as diminishing marginal cost?
How is the total cost curve obtained?
How is the total cost curve obtained?
What property does the variable cost curve share with the production function?
What property does the variable cost curve share with the production function?
What does a positive yet decreasing slope of the variable cost curve indicate?
What does a positive yet decreasing slope of the variable cost curve indicate?
What is the significance of the y-intercept of the total cost curve?
What is the significance of the y-intercept of the total cost curve?
How is increasing marginal product of labor interpreted in terms of variable costs?
How is increasing marginal product of labor interpreted in terms of variable costs?
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Study Notes
Cost Curves
- The three cost curves ( 𝐴𝐴𝐴𝐴𝐴𝐴, 𝐴𝐴𝐴𝐴𝐴𝐴, and 𝑀𝑀𝑀𝑀) are 𝑈𝑈-shaped, meaning they all have a minimum.
- 𝐴𝐴𝐴𝐴𝐴𝐴 always lies above 𝐴𝐴𝐴𝐴𝐴𝐴 (𝐴𝐴𝐴𝐴𝐴𝐴 > 𝐴𝐴𝐴𝐴𝐴𝐴), but they diverge as 𝑞𝑞 → 0 while converging as 𝑞𝑞 → ∞.
- 𝑀𝑀𝑀𝑀 determines 𝐴𝐴𝐴𝐴𝐴𝐴 and 𝐴𝐴𝐴𝐴𝐴𝐴: when 𝑀𝑀𝑀𝑀 < 𝐴𝐴𝐴𝐴𝐴𝐴, 𝐴𝐴𝐴𝐴𝐴𝐴 decreases, when 𝑀𝑀𝑀𝑀 > 𝐴𝐴𝐴𝐴𝐴𝐴, 𝐴𝐴𝐴𝐴𝐴𝐴 increases.
Cost Function and Variable Costs
- The cost function is the inverse of the production function.
- Variable costs (VC) can be written as the inverse of the production function: VC = f⁻¹(q).
- The variable cost curve is obtained by swapping the x- and y-axis of the production function.
- The variable cost curve has a positive yet decreasing slope as the output increases from 0 to q1, and a positive yet increasing slope as the output increases from q1 to q2.
Total Cost Curve
- Total cost (TC) is the sum of fixed costs and variable costs: 𝑇𝑇𝑇𝑇 = 𝐹𝐹𝐹𝐹 + 𝑉𝑉𝑉𝑉.
- The total cost curve is obtained by shifting the variable cost curve upward for the size of fixed costs denoted by c0.
- The total cost curve has a positive y-intercept equal to c0, which is the size of fixed costs.
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