Cost Curves We looked at cost curves cy
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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)=y 2? • How about the curves for c(y)=y 2+1? • Where do the marginal cost curve and average cost curve intersect (always)? Why? • Bonus: What technology gives us cost curves of c(y)= y 2+1?
Adding two cost curves? • If you have two plants with costs c 1(y) and c 2(y), what is your combined costs? (Assume DRS. ) • For each additional unit, where would you produce it? • How would this work for c 1(y)=c 2(y)=y 2?
Profit Maximization Revisited • We can now write profit maximization of a competitive firm in terms of the cost function Maxy p*y-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)=y 2? • With general c(y), when would a firm shut down?
Entry • Assume firms freely enter a competitive industry where costs are fixed costs plus DRS (like c(y)=1+y 2). • Demand is decreasing D’(q)<0. • 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?
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?
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.
