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The Only Property That Is Surprising Here Is The Concavity
The Only Property That Is Surprising Here Is The Concavity
However, we
can provide intuition for this property similar to the one presented for the
profit function. Suppose we graph cost as a function of the price of a single
input, with all other prices held constant. If the price of a factor rises, costs
will never go down (property I), but they will go up at a decreasing rate
(property 3). Why? Because as this one factor becomes more expensive
and other prices stay the same, the cost-minimizing firm will shift away
from it to use other inputs.
This is made more clear by considering Figure 5.4. Let x* be a costminimizing
bundle at prices w*. Suppose the price of factor 1 changes
from w;to wl.If we just behave passively and continue to use x*, our