Profit Max and Cost Min Review

1
Profit Max and Cost Min Review

• Firms always want to produce at least cost for a
  given output and quality level.
• Firms in perfect competition choose output where
  P MR MC.
• Monopoly firms choose output where MR MC

2
Cost Minimization Example
The price of capital is 8/unit, the price of
labor is 4/unit. So to compute cost of each
method, multiple unit prices by the number of
units used.
3
Cost Minimization Example
Once cost is computed for each method, it should
look like above.
4
Cost Minimization Example
Now choose cheapest method for each q. So, for
q1, best choice Is labor intensive because 40
lt 44.
5
Cost Minimization Example
So the minimum total cost column at the far right
is our final total cost. Those are the numbers we
would use to construct a cost table.
6
More Cost Min.
TVC TC - TFC
If we start with the TC column and assume that 3
units of capital are fixed, then the rest of the
table looks like the above. Note that the MC
doesnt look like we think it should, but that
is just because of the example setup.