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Berkeley ECON 100A - Lecture Notes

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Key issuesTwo-step procedure to choose technologyTwo reasons to study costsBusiness vs. economic costsCost of running your own firmSlide 6Capital costsIf capital is rentedIf capital is purchasedDepreciate a business vehicleShort-run cost measuresSunk fixed costSlide 14Marginal cost (MC)Average cost conceptsShort-Run Cost CurvesMC curve cuts AC and AVC at their minimum pointsSolved problemAnswerProduction function determines shape of cost curveSlide 22Slide 23Answer (continued)Norwegian printing firmShort-Run Cost Curves for a Printing FirmCost effects of $10 specific taxEffects of a Specific Tax on Cost CurvesCost effects of lump-sum taxSlide 30Lump-sum tax: CaliforniaLump-sum tax: New YorkLong-run costsInput choiceCosts of input bundlesA Family of Isocost LinesProperties of isocost linesCost minimization for Norwegian printing firmEquivalent cost-minimizing rulesDerivation of last dollar ruleCost minimizing vs. output maximizingRelative factor price changesChange in Factor PriceDemolishing buildings: U.S.Demolish buildings: Hong KongLR cost varies with outputExpansion Path and Long-Run cost CurveSlide 48Solved ProblemSlide 50Results for Lower WageShape of LR cost curvesLong-Run Cost CurvesEconomies of scaleCauses of economies of scaleCosts lower in long runLong-Run Average Cost as the Envelope of Short-Run Average Cost CurvesLong-Run Cost Curves in PrintingLong-Run Cost Curves in Oil PipelinesWhy LR cost  SR costLearning by DoingSlide 62Technical progressCost of producing multiple goodsJoint productionJoint ProductionMeasuring scope (SC)ScopeEconomies of scopeDiseconomies of scopeSummaryMeasuring costs2. Short-run costs3. Long-run costs4. Costs are lower in long run5. Costs of producing multiple goodsKey issues1. measuring costs2. short-run cost minimization3. long-run cost minimization4. costs are lower in long run5. costs of producing multiple goods simultaneouslyTwo-step procedure to choose technology1. pick all technologically efficient production processes2. from these technologically efficient production processes, pick the one that is economically efficient (minimizes cost)Two reasons to study costs1. understanding relationship between costs of inputs and production helps us determine least costly way to produce2. relationship between output and costs determines nature of an industry•how many firms are in the industry•how high price is relative to costBusiness vs. economic costs•business costs: only explicit costs (out of pocket)•economic costs: explicit cost + implicit cost = opportunity cost•opportunity cost•value of best alternative use of the resource•classic example: "There's no such thing as a free lunch" •“What have you given up to study opportunity costs”Cost of running your own firm•explicit cost: $40,000 per year (rent, materials, wage payments)•instead of paying yourself a salary, you keep any profit at year's end•your labor opportunity cost = $25,000/year you could have earned working for another firm• business cost = $40,000• economic cost = $65,000 = $40,000 + $25,000“It’s exactly this sort of attitude toward work, Orville, that has kept you from owning your own business.”Capital costs•capital is a durable good: a product that is usable for years •capital may be rented or purchasedIf capital is rented •rental payment is the opportunity cost•using the rental rate avoids 2 measurement problems•don't have to worry how to allocate the initial purchase cost over time•any adjustment in the cost of capital over time is reflected in the rental rateIf capital is purchased•firm's bookkeeper may •expense cost by recording purchase price when it's made, or•amortize cost by spreading it over life of capital according to IRS's arbitrary rules•economists amortize capital cost based on its opportunity cost at each moment of time:•amount that firm could charge others to rent capital•thus, economists always use rental rateDepreciate a business vehicle•Toyota Land Cruiser (sports utility vehicle) and Cadillac Seville (car) both cost $45,000•tax law let’s you depreciate Land Cruiser in 6 years vs. 23 for Seville•after 5 years depreciated $42,408 for Land Cruiser vs. $14,460 for Seville•“reason”•Land Cruiser weighs more than 6,000 pounds and Seville doesn't•Congress uses 6,000 pounds as a criterion to distinguish between trucks and carsShort-run cost measures•fixed cost (F): production expense that does not vary with output•variable cost (VC): production expense that changes with quantity of output produced •total cost (C):C = VC + FSunk fixed cost•usually assume fixed cost is sunk: expenditure that cannot be recovered •opportunity cost of capital is zero•because you can't get this expenditure back no matter what you do, so ignore it when making decisions•example: walk out of a bad movie early, regardless of what you paid to attend•otherwise, fixed cost is avoidableMarginal cost (MC)Average cost conceptsShort-Run Cost CurvesMC curve cuts AC and AVC at their minimum points•AC and AVC curves fall when MC is below them, and rise when MC is above them•therefore, MC cuts AC and AVC curves at their minimum pointsSolved problem•if short-run cost function is C = 125 + 2q + q2•what are the:fixed costvariable costaverage costaverage fixed costaverage variable cost?AnswerProduction function determines shape of cost curve•production function shows how many inputs needed to produce a given level of output•firm's cost: multiply quantity of each input by its price and sumSolved problem•if a janitorial service firm's only variable cost is wage payments where •wage: w = $8 per worker per an hour•each worker cleans 4 offices per hour•what are the•variable cost•average variable cost•marginal cost of cleaning one more office?AnswerAnswer (continued)Norwegian printing firm•short-run AC curve is U-shaped even though AVC is strictly upward sloping•firm's capital is fixed at 100Short-Run Cost Curves for a Printing FirmCost effects of $10 specific taxEffects of a Specific Tax on Cost CurvesCost effects of lump-sum taxLump-sum tax: California $800-per-year tax is levied “for the privilege of doing business in California”Lump-sum tax: New York $900,600 for three-year license to sell hot dogs in front of NY City's Metropolitan Museum of ArtLong-run costs•firm adjusts all its inputs so its cost of production is as low as possible•if capital and other variable can be


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Berkeley ECON 100A - Lecture Notes

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