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Optimization problems minimize cost11/11/2023 ![]() But the lights are simply on or off, and the cost of powering them does not change when output changes.Ī variable cost is a cost that changes as output changes. For example, a firm might need to pay for the lights to be on in order for the workers to see what they are doing and for production to happen. Fixed and Variable CostsĪ fixed cost is a cost that does not change as output changes. To make efficient or cost-minimizing decisions, it is important to understand some basic cost concepts, starting with fixed and variable costs as well as opportunity costs, sunk costs, and depreciation. She does not want to use any extra inputs, and she does not want to pick a mix of inputs that costs more than another mix of inputs that produces the same amount of output. Her task, in other words, is to run her factory as efficiently as possible. She must choose the mix of inputs the factory will use to achieve the production target. She is responsible for producing a specific amount of output at the lowest possible cost. Later, in chapter 9, “Profit Maximization and Supply,” we will see that producing at the lowest cost is what profit maximizing firms must do (otherwise, they cannot possibly be maximizing profit!).Ī good way to think about the cost side of the firm is to consider a manager who is in charge of running a factory for a large company. To be as efficient as possible means that the firm wants to produce output at the lowest possible cost.įor now, we assume that firms want to produce as efficiently as possible-in other words, minimize costs. In order to draw a cost curve that shows a single cost for each output amount, we have to understand how firms make the decision about which set of possible inputs to use to be as efficient as possible. This chapter studies production costs-that is, how costs are related to output. ![]() The topics of this chapter will help us locate that point. So the key question for firms is, Which point on an isoquant is the best choice? The answer is the point that represents the lowest cost. Of course, inputs are not free: the firm must pay workers for their labor, buy raw materials, and buy or rent machines, all of which are costly. Each point on an isoquant represents a different combination of inputs that produces the same amount of output. Learning Objective 7.1: Explain fixed and variable costs, opportunity cost, sunk cost, and depreciation.įrom the isoquants described in chapter 6, we know that firms have many choices of input combinations to produce the same amount of output. Learning Objective 7.5: Apply the concept of cost minimization to a minimum-wage policy. Learning Objective 7.4: Analyze the effect of changes in prices or output on total cost. Learning Objective 7.3: Describe the solution to the cost minimization problem in the long run. Learning Objective 7.2: Describe the solution to the cost minimization problem in the short run. Learning Objective 7.1: Explain fixed and variable costs, opportunity cost, sunk cost, and depreciation. What potential disadvantages to raising the minimum wage are identified?.What potential benefits to raising the minimum wage are identified in the article?.Read the Labor Day Turns Attention Back to Minimum-Wage Debate article and answer the following questions: This chapter studies the cost minimization problem for firms: how to most efficiently use inputs to produce output. Doing anything else cannot be a profit maximizing strategy. The goal of any profit maximizing firm is to produce any level of output at the minimum cost. These inputs are costly, so firms must be smart about how they use labor, capital, and other inputs to achieve a certain level of output. In order to provide goods and services to the marketplace, firms use inputs. This knowledge will allow us to address the question of whether firms are likely to reduce the amount of labor they employ if the minimum wage is increased. In this chapter, we will study how firms decide how much of each input to employ in their production of a good or service. There are many questions of debate about minimum wages as an effective policy tool to tackle these problems, but one common criticism of minimum wages is that they increase unemployment. Recently, a much-discussed policy topic in the United States is the idea of increasing minimum wages as a response to poverty and growing income inequality. Will an Increase in the Minimum Wage Decrease Employment?
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