9781118041581

This appendix takes a closer quantitative look at the cost setting of Spreadsheet

Problem S1 and its illustration in Figure 6.3. We start with the following eco-

nomic facts. Let the firm’s production function be given by

[6A.1]

where L and K are in thousands of units. The prices of labor and capital are

PL36 per unit and PK16 per unit, respectively.

SHORT-RUN COSTS We begin by deriving expressions for the firm’s SAC and

SMC. To do this, we fix the amount of capital at some level; call this K. With

capital fixed, we solve Equation 6A.1 for L:

[6A.2]

Total cost is

after substituting for L. In turn, short-run average cost is

SACC/Q16K/QQ/(4K) [6A.3]

16KQ^2 /(4K)

C16K36L

LQ^2 /(144K).

Q12L.5K.5 122 L# 2 K

SPECIAL APPENDIX

TO CHAPTER 6

Short-Run and

Long-Run Costs

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