Cost Curves

1
Cost Curves

• We looked at cost curves c(y) vs. y.
• Now let us look at marginal cost and average cost
  curves. These are c(y) vs y and c(y)/y vs. y,
  respectively.
• What are the curves for c(y)y2?
• How about the curves for c(y)y21?
• Where do the marginal cost curve and average cost
  curve intersect (always)? Why?
• Bonus What technology gives us cost curves of
  c(y) y21?

2
Adding two cost curves?

• If you have two plants with costs c1(y) and
  c2(y), what is your combined costs? (Assume DRS.)
• For each additional unit, where would you produce
  it?
• How would this work for c1(y)c2(y)y2?

3
Profit Maximization Revisited

• We can now write profit maximization of a
  competitive firm in terms of the cost function
• Maxy py-c(y)
• What is the FOC?
• How does this relate to the FOC of the old profit
  maximization problem, p f(x)w?
• What is profits and choice of y if c(y)y2?
• With general c(y), when would a firm shut down?

4
Entry

• Assume firms freely enter a competitive industry
  where costs are fixed costs plus DRS (like
  c(y)1y2).
• Demand is decreasing D(q)lt0.
• For a given price, up to where would a firm
  produce? When would a firm enter?
• When would a firm leave?
• What can the only competitive price be?
• What are profits here?

5
Licenses

• How about if we fix the amount of entry?
• One way is with licenses Liquor, Taxi, etc..
• Does this cause the profits to be positive?
• Licenses can be bought or sold on the market.
  What is your decision to buy a license?
• Does raising fares improve hourly wages of taxi
  drivers?

6
Two tier oil prices.

• In 1974 the US department of Energy wanted to
  prevent local oil producers from benefiting from
  OPEC.
• Two-tier They prevented charging any more per
  barrel to refineries than before the boycott.
  Only half oil was domestic. This created a
  two-tiered system. Who benefited?
• Price controls They then put price controls
  based upon costs. Caused problems/shortages.
• Entitlement Then adopted policy of one-barrel of
  foreign allows you to buy one barrel of domestic.
• Tax Finally, just levied a tax on domestic
  production.