ECON 356

In Class Exercise Ten - The Theory of the Firm:  The Mainstream Theory - Costs

1.  Derive a total cost curve graphically from the variable cost curve and the fixed cost curve.  Assume your fixed costs are = $50.

2.  Draw a marginal cost curve and an average total cost curve on the same graph.  Why are they shaped the way they are?  Can you tell from your graph where the level of output is where average total costs are minimized? 

3.  Capital and labor our the only two inputs.  If the price of capital is = r = $15 and the price of labor = w = $8, what different combination of inputs can this firm purchase for a total expenditure or cost  = $500.00 day?  Draw this isocost curve with numbers.

4.  Now show how your isocost curve would change if the price of labor increased to $10 (ceteris paribus) - show graphically both the old and new curves.

5.  Show graphically where a firm would operate in order to maximize its output given a certain total expenditure or cost.

6.  In the long run, capital and labor can vary.  Show this by drawing an Output Expansion Path. 

7.  How does the Output Expansion Path relate to the long run average total cost curve?  Can you show this graphically and explain in words?

8.  Draw a long run average total cost curve such that there is first, increasing returns to scale, then constant returns to scale, then decreasing returns to scale throughout the output level.

9.  Put the Minimum Efficient Scale quantity on your graph above.  What does that point represent?