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Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000---100200200125300133.34001505002006002501Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000---10010,00020020010,00012530010,000133.340010,00015050010,00020060010,0002502Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000---10010,00020,00020020010,00012530010,000133.340010,00015050010,00020060010,0002503Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000---10010,00020,00020020010,00025,00012530010,00040,000133.340010,00060,00015050010,000100,00020060010,000150,0002504Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000---10010,00010,00020,00020020010,00015,00025,00012530010,00030,00040,000133.340010,00050,00060,00015050010,00090,000100,00020060010,000140,000150,0002505Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,0000---10010,00010,00020,00020020010,00015,00025,00012530010,00030,00040,000133.340010,00050,00060,00015050010,00090,000100,00020060010,000140,000150,0002506Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000---10010,00010,00020,00020020010,00015,00025,00012530010,00030,00040,000133.340010,00050,00060,00015050010,00090,000100,00020060010,000140,000150,0002507Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000---------10010,00010,00020,00010020020010,00015,00025,0005012530010,00030,00040,00033.3133.340010,00050,00060,0002515050010,00090,000100,0002020060010,000140,000150,00016.72508Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000---------10010,00010,00020,00010010020020010,00015,00025,000507512530010,00030,00040,00033.3100133.340010,00050,00060,0002512515050010,00090,000100,0002018020060010,000140,000150,00016.7233.32509Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000---------10010,00010,00020,00010010020020010,00015,00025,000507512530010,00030,00040,00033.3100133.340010,00050,00060,0002512515050010,00090,000100,0002018020060010,000140,000150,00016.7233.3250MC = cost of making an extra unit10Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000---------10010,00010,00020,00010010020020010,00015,00025,000507512530010,00030,00040,00033.3100133.340010,00050,00060,0002512515050010,00090,000100,0002018020060010,000140,000150,00016.7233.3250

11Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000---------10010,00010,00020,00010010020020010,00015,00025,000507512530010,00030,00040,00033.3100133.340010,00050,00060,0002512515050010,00090,000100,0002018020060010,000140,000150,00016.7233.3250

12Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000---------10010,00010,00020,00010010020010020010,00015,00025,000507512530010,00030,00040,00033.3100133.340010,00050,00060,0002512515050010,00090,000100,0002018020060010,000140,000150,00016.7233.3250

13Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000---------10010,00010,00020,00010010020010020010,00015,00025,00050751255030010,00030,00040,00033.3100133.340010,00050,00060,0002512515050010,00090,000100,0002018020060010,000140,000150,00016.7233.3250

14Production. CostsProblem 6 on p.194. OutputFCVC TCAFCAVCATCMC010,000010,000------------10010,00010,00020,00010010020010020010,00015,00025,00050751255030010,00030,00040,00033.3100133.315040010,00050,00060,0002512515020050010,00090,000100,0002018020040060010,000140,000150,00016.7233.3250500

15If cost is given as a function of Q, then For example:TC = 10,000 + 200 Q + 150 Q2MC = ?

16Profit is believed to be the ultimate goal of any firm. If the production unit described in the problem above can sell as many units as it wants for P=$360, what is the best quantity to produce (and sell)? 17OutputFCVC TCAFCAVCATCMC010,000010,000------------10010,00010,00020,00010010020010020010,00015,00025,00050751255030010,00030,00040,00033.3100133.315040010,00050,00060,0002512515020050010,00090,000100,0002018020040060010,000140,000150,00016.7233.3250500Profit is believed to be the ultimate goal of any firm. If the production unit described in the problem above can sell as many units as it wants for P=$360, what is the best quantity to produce (and sell)? 18OutputFCVC TC010,000010,00010010,00010,00020,00020010,00015,00025,00030010,00030,00040,00040010,00050,00060,00050010,00090,000100,00060010,000140,000150,000Doing it the aggregate way,by actually calculating the profit:19OutputFCVC TCTR010,000010,00010010,00010,00020,00020010,00015,00025,00030010,00030,00040,00040010,00050,00060,00050010,00090,000100,00060010,000140,000150,000Doing it the aggregate way,by actually calculating the profit:P=$36020OutputFCVC TCTR010,000010,000010010,00010,00020,00036,00020010,00015,00025,00072,00030010,00030,00040,000108,00040010,00050,00060,000144,00050010,00090,000100,000180,00060010,000140,000150,000216,000Doing it the aggregate way,by actually calculating the profit:P=$36021OutputFCVC TCTRProfit010,000010,0000 10010,00010,00020,00036,00020010,00015,00025,00072,00030010,00030,00040,000108,00040010,00050,00060,000144,00050010,00090,000100,000180,00060010,000140,000150,000216,000Doing it the aggregate way,by actually calculating the profit:P=$36022OutputFCVC TCTRProfit010,000010,000010,000 10010,00010,00020,00036,00016,00020010,00015,00025,00072,00047,00030010,00030,00040,000108,00068,00040010,00050,00060,000144,00084,00050010,00090,000100,000180,00080,00060010,000140,000150,000216,00066,000Doing it the aggregate way,by actually calculating the profit:P=$36023OutputFCVC TCTRProfit010,000010,000010,000 10010,00010,00020,00036,00016,00020010,00015,00025,00072,00047,00030010,00030,00040,000108,00068,00040010,00050,00060,000144,00084,00050010,00090,000100,000180,00080,00060010,000140,000150,000216,00066,000Doing it the aggregate way,by actually calculating the profit:P=$36024Alternative: The Marginal ApproachThe firm should produce only units that are worth producing, that is, those for which the selling price exceeds the cost of making them.OutputFCVC TCAFCAVCATCMC010,000010,000------------10010,00010,00020,00010010020010020010,00015,00025,00050751255030010,00030,00040,00033.3100133.315040010,00050,00060,0002512515020050010,00090,000100,0002018020040060010,000140,000150,00016.7233.3250500< 360> 36025Principle (Marginal approach to profit maximization): If data is provided in discrete (tabular) form, then profit is maximized by producing all the units for which and stopping right before the unit for which

26Principle (Marginal approach to profit maximization): If data is provided in discrete (tabular) form, then profit is maximized by producing all the units for which MR > MCand stopping right before the unit for which MR < MC In our case, price of output stays constant throughout therefore MR = P(an extra unit increases TR by the amount it sells for)If costs are continuous functions of QOUTPUT, then profit is maximized where 27Principle (Marginal approach to profit maximization): If data is provided in discrete (tabular) form, then profit is maximized by producing all the units for which MR > MCand stopping right before the unit for which MR < MC In our case, price of output stays constant throughout therefore MR = P(an extra unit increases TR by the amount it sells for)If costs are continuous functions of QOUTPUT, then profit is maximized where MR=MC28What if FC is $100,000 instead of $10,000? How does the profit maximization point change?OutputFCVC TCTRProfit010,000010,000010,000 10010,00010,00020,00036,00016,00020010,00015,00025,00072,00047,00030010,00030,00040,000108,00068,00040010,00050,00060,000144,00084,00050010,00090,000100,000180,00080,00060010,000140,000150,000216,00066,000What if FC is $100,000 instead of $10,000? How does the profit maximization point change?OutputFCVC TCTRProfit0100,000010,000010,000 100100,00010,00020,00036,00016,000200100,00015,00025,00072,00047,000300100,00030,00040,000108,00068,000400100,00050,00060,000144,00084,000500100,00090,000100,000180,00080,000600100,000140,000150,000216,00066,000What if FC is $100,000 instead of $10,000? How does the profit maximization point change?OutputFCVC TCTRProfit0100,0000100,000010,000 100100,00010,000110,00036,00016,000200100,00015,000115,00072,00047,000300100,00030,000130,000108,00068,000400100,00050,000150,000144,00084,000500100,00090,000190,000180,00080,000600100,000140,000240,000216,00066,000What if FC is $100,000 instead of $10,000? How does the profit maximization point change?OutputFCVC TCTRProfit0100,0000100,0000100,000 100100,00010,000110,00036,00074,000200100,00015,000115,00072,00043,000300100,00030,000130,000108,00022,000400100,00050,000150,000144,0006,000500100,00090,000190,000180,00010,000600100,000140,000240,000216,00024,000What if FC is $100,000 instead of $10,000? How does the profit maximization point change?OutputFCVC TCTRProfit0100,0000100,0000100,000 100100,00010,000110,00036,00074,000200100,00015,000115,00072,00043,000300100,00030,000130,000108,00022,000400100,00050,000150,000144,0006,000500100,00090,000190,000180,00010,000600100,000140,000240,000216,00024,000Fixed cost does not affect the firms optimal short-term output decision and can be ignored while deciding how much to produce today.

Principle:Consistently low profits may induce the firm to close down eventually (in the long run) but not any sooner than your fixed inputs become variable ( your building lease expires, your equipment wears out and new equipment needs to be purchased, you are facing the decision of whether or not to take out a new loan, etc.)

Sometimes, it is more convenient to formulate a problem not through costs as a function of output but through output (product) as a function of inputs used.

Problem 2 on p.194.Diminishing returns what are they?In the short run, every company has some inputs fixed and some variable. As the variable input is added, every extra unit of that input increases the total output by a certain amount; this additional amount is called marginal product. The term, diminishing returns, refers to the situation when the marginal product of the variable input starts to decrease (even though the total output may still keep going up!)Total output, or Total Product, TPAmount of input usedAmount of input usedMarginal product, MPRange of diminishing returnsKLQMPK020012050220150320300420400520450620475Calculating the marginal product (of capital) for the data in Problem 2:KLQMPK0200---1205050220150320300420400520450620475Calculating the marginal product (of capital) for the data in Problem 2:KLQMPK0200---12050502201501003203001504204001005204505062047525Calculating the marginal product (of capital) for the data in Problem 2:In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)Implications for the marginal cost relationship:Worker #10 costs $8/hr, makes 10 units. MCunit =

In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)Implications for the marginal cost relationship:Worker #10 costs $8/hr, makes 10 units. MCunit = $0.80

Worker #11 costs $8/hr, makes In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)Implications for the marginal cost relationship:Worker #10 costs $8/hr, makes 10 units. MCunit = $0.80

Worker #11 costs $8/hr, makes 8 units. MCunit = In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)Implications for the marginal cost relationship:Worker #10 costs $8/hr, makes 10 units. MCunit = $0.80

Worker #11 costs $8/hr, makes 8 units. MCunit = $1 In other words, we know we are in the range of diminishing returns when the marginal product of the variable input starts falling, or, the rate of increase in total output slows down.(Ex: An extra worker is not as useful as the one before him)Implications for the marginal cost relationship:Worker #10 costs $8/hr, makes 10 units. MCunit = $0.80

Worker #11 costs $8/hr, makes 8 units. MCunit = $1 In the range of diminishing returns, MP of input is falling and MC of output is increasingMarginal cost, MCAmount of outputAmount of input usedMarginal product, MPThis amount of output corresponds to this amount of input When MP of input is decreasing, MC of output is increasing and vice versa.

Therefore the range of diminishing returns can be identified by looking at either of the two graphs.(Diminishing marginal returns set in at the max of the MP graph, or at the min of the MC graph)Back to problem 2, p.194.To find the profit maximizing amount of input (part d), we will once again use the marginal approach, which compares the marginal benefit from a change to the marginal cost of than change.More specifically, we compare VMPK, the value of marginal product of capital, to the price of capital, or the rental rate, r.KLQMPKVMPKr0200---12050502201501003203001504204001005204505062047525Back to problem 2, p.194.To find the profit maximizing amount of input (part d), we will once again use the marginal approach, which compares the marginal benefit from a change to the marginal cost of than change.More specifically, we compare VMPK, the value of marginal product of capital, to the price of capital, or the rental rate, r.KLQMPKVMPKr0200------1205050100220150100200320300150300420400100200520450501006204752550Back to problem 2, p.194.To find the profit maximizing amount of input (part d), we will once again use the marginal approach, which compares the marginal benefit from a change to the marginal cost of than change.More specifically, we compare VMPK, the value of marginal product of capital, to the price of capital, or the rental rate, r.KLQMPKVMPKr0200------1205050100752201501002007532030015030075420400100200755204505010075620475255075>>>>>

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