Chapter 21

Cost
Minimization
 Cost Minimization

uA firm is a cost-minimizer if it
produces any given output level y ³ 0
at smallest possible total cost.
u c(y) denotes the firm’s smallest
possible total cost for producing y
units of output.
u c(y) is the firm’s total cost function.
 Cost Minimization

u When the firm faces given input

prices w = (w1,w2,…,wn) the total cost
function will be written as
c(w1,…,wn,y).
The Cost-Minimization Problem

u Consider a firm using two inputs to

make one output.
u The production function is
y = f(x1,x2).
u Take the output level y ³ 0 as given.
u Given the input prices w1 and w2, the
cost of an input bundle (x1,x2) is
w1x1 + w2x2.
The Cost-Minimization Problem

u Forgiven w1, w2 and y, the firm’s

cost-minimization problem is to
solve min w 1x1 + w 2x 2
x1 ,x 2 ³ 0
subject to f ( x1 , x 2 ) = y.
The Cost-Minimization Problem
u The levels x1*(w1,w2,y) and x2*(w1,w2,y)
in the least-costly input bundle are the
firm’s conditional demands for inputs
1 and 2.
u The (smallest possible) total cost for
producing y output units is therefore
c( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y )
+ w 2x*2 ( w 1 , w 2 , y ).
 Conditional Input Demands

u Given w1, w2 and y, how is the least

costly input bundle located?
u And how is the total cost function
computed?
 Iso-cost Lines

uA curve that contains all of the input

bundles that cost the same amount
is an iso-cost curve.
u E.g., given w1 and w2, the $100 iso-
cost line has the equation
w 1x1 + w 2x 2 = 100.
 Iso-cost Lines

u Generally,given w1 and w2, the

equation of the $c iso-cost line is
w 1x1 + w 2x 2 = c
i.e. w c
x 2 = - 1 x1 + .
w2 w2

u Slope is - w1/w2.
 Iso-cost Lines
x2

c” º w1x1+w2x2

c’ º w1x1+w2x2

c’ < c”

x1
 Iso-cost Lines
x2 Slopes = -w1/w2.

c” º w1x1+w2x2

c’ º w1x1+w2x2

c’ < c”

x1
 The y’-Output Unit Isoquant
x2
All input bundles yielding y’ units
of output. Which is the cheapest?

f(x1,x2) º y’
x1
The Cost-Minimization Problem
x2
All input bundles yielding y’ units
of output. Which is the cheapest?

f(x1,x2) º y’
x1
The Cost-Minimization Problem
x2
All input bundles yielding y’ units
of output. Which is the cheapest?

f(x1,x2) º y’
x1
The Cost-Minimization Problem
x2
All input bundles yielding y’ units
of output. Which is the cheapest?

f(x1,x2) º y’
x1
The Cost-Minimization Problem
x2
All input bundles yielding y’ units
of output. Which is the cheapest?

x2*
f(x1,x2) º y’
x1* x1
The Cost-Minimization Problem
At an interior cost-min input bundle:
x2 * *
(a) f ( x1 , x 2 ) = y ¢

x2*
f(x1,x2) º y’
x1* x1
The Cost-Minimization Problem
At an interior cost-min input bundle:
x2 * *
(a) f ( x1 , x 2 ) = y ¢ and
(b) slope of isocost = slope of
isoquant

x2*
f(x1,x2) º y’
x1* x1
The Cost-Minimization Problem
At an interior cost-min input bundle:
x2 * *
(a) f ( x1 , x 2 ) = y ¢ and
(b) slope of isocost = slope of
isoquant; i.e.
w1 MP1
- = TRS = - at ( x*1 , x*2 ).
w2 MP2
x2*
f(x1,x2) º y’
x1* x1
 A Cobb-Douglas Example of
Cost Minimization
uA firm’s Cobb-Douglas production
function is
y = f ( x1 , x 2 ) = x11/ 3x 22/ 3 .

u Inputprices are w1 and w2.

u What are the firm’s conditional input
demand functions?
 A Cobb-Douglas Example of
Cost Minimization
At the input bundle (x1*,x2*) which minimizes
the cost of producing y output units:
(a) y = ( x* )1/ 3 ( x* ) 2/ 3 and
1 2
(b)
w1 ¶ y / ¶ x1 (1 / 3)( x*1 ) -2/ 3 ( x*2 ) 2/ 3
- =- =-
w2 ¶ y / ¶ x2 ( 2 / 3)( x*1 )1/ 3 ( x*2 ) -1/ 3
x*2
=- .
2x*1
 A Cobb-Douglas Example of
Cost Minimization
w x*
* 1/ 3 * 2/ 3 1 = 2 .
(a) y = ( x1 ) ( x 2 ) (b)
w 2 2x*1
 A Cobb-Douglas Example of
Cost Minimization
w x*
* 1/ 3 * 2/ 3 1 = 2 .
(a) y = ( x1 ) ( x 2 ) (b)
w 2 2x*1
* 2w 1 *
From (b), x 2 = x1 .
w2
 A Cobb-Douglas Example of
Cost Minimization
w x*
* 1/ 3 * 2/ 3 1 = 2 .
(a) y = ( x1 ) ( x 2 ) (b)
w 2 2x*1
* 2w 1 *
From (b), x 2 = x1 .
w2
Now substitute into (a) to get
2/ 3
* 1/ 3 æ 2w 1 * ö
y = ( x1 ) ç x ÷
è w 2 1ø
 A Cobb-Douglas Example of
Cost Minimization
w x*
* 1/ 3 * 2/ 3 1 = 2 .
(a) y = ( x1 ) ( x 2 ) (b)
w 2 2x*1
* 2w 1 *
From (b), x 2 = x1 .
w2
Now substitute into (a) to get
2/ 3 2/ 3
* 1/ 3 æ 2w 1 * ö æ 2w 1 ö
y = ( x1 ) ç x1 ÷ =ç ÷ x*1 .
è w2 ø è w2 ø
 A Cobb-Douglas Example of
Cost Minimization
w x*
* 1/ 3 * 2/ 3 1 = 2 .
(a) y = ( x1 ) ( x 2 ) (b)
w 2 2x*1
* 2w 1 *
From (b), x 2 = x1 .
w2
Now substitute into (a) to get
2/ 3 2/ 3
* 1/ 3 æ 2w 1 * ö æ 2w 1 ö
y = ( x1 ) ç x1 ÷ =ç ÷ x*1 .
è w2 ø è w2 ø
2/ 3
æ w ö
So x*1 = ç 2 ÷ y is the firm’s conditional
è 2w 1 ø
demand for input 1.
 A Cobb-Douglas Example of
Cost Minimization 2/ 3
2w 1 * æ w ö
Since x*2 = x1 and x*1 = ç 2 ÷ y
w2 è 2w 1 ø
2/ 3 1/ 3
2w 1 æ w 2 ö æ 2w 1 ö
x*2 = ç ÷ y=ç ÷ y
w 2 è 2w 1 ø è w2 ø
is the firm’s conditional demand for input 2.
 A Cobb-Douglas Example of
Cost Minimization
So the cheapest input bundle yielding y
output units is

(x*1 ( w1 , w 2 , y), x*2 ( w1 , w 2 , y))

æ æ w ö 2/ 3 æ 2w ö 1/ 3 ö
= çç 2 ÷ y, ç 1
÷ y÷÷ .
ç è 2w 1 ø è w 2ø
è ø
Conditional Input Demand Curves
Fixed w1 and w2.

y¢¢¢
y¢¢
y¢
 Conditional Input Demand Curves
y
Fixed w1 and w2.

y¢

y x*2 ( y¢ ) x*2

y¢¢¢
x*2 ( y¢ ) y¢¢ y¢
y¢
x*1 ( y¢ ) x*1 ( y¢ ) x*1
 Conditional Input Demand Curves
y
Fixed w1 and w2.

y¢¢
y¢

y x*2 ( y¢ ) x*2
x*2 ( y¢¢ )

x*2 ( y¢¢ )
y¢¢¢ y¢¢
x*2 ( y¢ ) y¢¢ y¢
y¢
x*1 ( y¢ ) x*1 ( y¢ ) x*1
x*1 ( y¢¢ ) x*1 ( y¢¢ )
 Conditional Input Demand Curves
y
Fixed w1 and w2.
y¢¢¢
y¢¢
y¢

y x*2 ( y¢ ) x*2 ( y¢¢¢ ) x*2

*
x*2 ( y¢¢¢ ) x 2 ( y¢¢ )
y¢¢¢
x*2 ( y¢¢ )
y¢¢¢ y¢¢
x*2 ( y¢ ) y¢¢ y¢
y¢
x*1 ( y¢ ) x*1 ( y¢¢¢ ) x*1 ( y¢ ) x*1 ( y¢¢¢ ) x*1
x*1 ( y¢¢ ) x*1 ( y¢¢ )
 Conditional Input Demand Curves
y
Fixed w1 and w2.
y¢¢¢
y¢¢
output
y¢
expansion
path y x*2 ( y¢ ) x*2 ( y¢¢¢ ) x*2
*
x*2 ( y¢¢¢ ) x 2 ( y¢¢ )
y¢¢¢
x*2 ( y¢¢ )
y¢¢¢ y¢¢
x*2 ( y¢ ) y¢¢ y¢
y¢
x*1 ( y¢ ) x*1 ( y¢¢¢ ) x*1 ( y¢ ) x*1 ( y¢¢¢ ) x*1
x*1 ( y¢¢ ) x*1 ( y¢¢ )
 Conditional Input Demand Curves
y Cond. demand
Fixed w1 and w2. for
y¢¢¢ input 2
y¢¢
output
y¢
expansion
path y x*2 ( y¢ ) x*2 ( y¢¢¢ ) x*2
*
x*2 ( y¢¢¢ ) x 2 ( y¢¢ )
y¢¢¢ Cond.
x*2 ( y¢¢ ) demand
y¢¢¢ y¢¢
x*2 ( y¢ ) y¢¢ for
y¢
y¢ input 1
x*1 ( y¢ ) x*1 ( y¢¢¢ ) x*1 ( y¢ ) x*1 ( y¢¢¢ ) x*1
x*1 ( y¢¢ ) x*1 ( y¢¢ )
 A Cobb-Douglas Example of
Cost Minimization
For the production function
y = f ( x1 , x 2 ) = x11 / 3x 22 / 3
the cheapest input bundle yielding y output
units is
(x*1 ( w1 , w 2 , y), x*2 ( w1 , w 2 , y))
æ æ w ö 2/ 3 æ 2w ö 1/ 3 ö
= çç 2 ÷ y, ç 1
÷ y÷÷ .
ç è 2w 1 ø è w 2ø
è ø
 A Cobb-Douglas Example of
Cost Minimization
So the firm’s total cost function is
c( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y ) + w 2x*2 ( w 1 , w 2 , y )
 A Cobb-Douglas Example of
Cost Minimization
So the firm’s total cost function is
c( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y ) + w 2x*2 ( w 1 , w 2 , y )
2/ 3 1/ 3
æ w ö æ 2w 1 ö
= w1 ç 2 ÷ y + w2ç ÷ y
è 2w 1 ø è w2 ø
 A Cobb-Douglas Example of
Cost Minimization
So the firm’s total cost function is
c( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y ) + w 2x*2 ( w 1 , w 2 , y )
2/ 3 1/ 3
æ w ö æ 2w 1 ö
= w1 ç 2 ÷ y + w2ç ÷ y
è 2w 1 ø è w2 ø
2/ 3
æ 1ö
=ç ÷ w 11/ 3 w 22/ 3 y + 21/ 3 w 11/ 3 w 22/ 3 y
è 2ø
 A Cobb-Douglas Example of
Cost Minimization
So the firm’s total cost function is
c( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y ) + w 2x*2 ( w 1 , w 2 , y )
2/ 3 1/ 3
æ w ö æ 2w 1 ö
= w1 ç 2 ÷ y + w2ç ÷ y
è 2w 1 ø è w2 ø
2/ 3
æ 1ö
=ç ÷ w 11/ 3 w 22/ 3 y + 21/ 3 w 11/ 3 w 22/ 3 y
è 2ø
1/ 3
æ w 1w 22 ö
= 3çç ÷÷ y.
è 4 ø
A Perfect Complements Example
of Cost Minimization
u The firm’s production function is
y = min{4x1 , x 2 }.

u Input prices w1 and w2 are given.

u What are the firm’s conditional
demands for inputs 1 and 2?
u What is the firm’s total cost
function?
A Perfect Complements Example
of Cost Minimization
x2
4x1 = x2

min{4x1,x2} º y’

x1
A Perfect Complements Example
of Cost Minimization
x2
4x1 = x2

min{4x1,x2} º y’

x1
A Perfect Complements Example
of Cost Minimization
x2
4x1 = x2 Where is the least costly
input bundle yielding
y’ output units?

min{4x1,x2} º y’

x1
 A Perfect Complements Example
of Cost Minimization
x2
4x1 = x2 Where is the least costly
input bundle yielding
y’ output units?

x2* = y min{4x1,x2} º y’

x1* x1
= y/4
 A Perfect Complements Example
of Cost Minimization
The firm’s production function is
y = min{ 4x1 , x 2 }
and the conditional input demands are
y
x*1 ( w 1 , w 2 , y ) = *
and x 2 ( w 1 , w 2 , y ) = y.
4
 A Perfect Complements Example
of Cost Minimization
The firm’s production function is
y = min{ 4x1 , x 2 }
and the conditional input demands are
y
x*1 ( w 1 , w 2 , y ) = *
and x 2 ( w 1 , w 2 , y ) = y.
4
So the firm’s total cost function is
c( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y )
+ w 2x*2 ( w 1 , w 2 , y )
 A Perfect Complements Example
of Cost Minimization
The firm’s production function is
y = min{ 4x1 , x 2 }
and the conditional input demands are
y
x*1 ( w 1 , w 2 , y ) = *
and x 2 ( w 1 , w 2 , y ) = y.
4
So the firm’s total cost function is
c( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y )
+ w 2x*2 ( w 1 , w 2 , y )
y æw ö
= w 1 + w 2 y = ç 1 + w 2 ÷ y.
4 è 4 ø
 Average Total Production Costs

u Forpositive output levels y, a firm’s

average total cost of producing y
units is c( w 1 , w 2 , y )
AC( w 1 , w 2 , y ) = .
y
 Returns-to-Scale and Av. Total
Costs
u The returns-to-scale properties of a
firm’s technology determine how
average production costs change with
output level.
u Our firm is presently producing y’
output units.
u How does the firm’s average
production cost change if it instead
produces 2y’ units of output?
 Constant Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
constant returns-to-scale then
doubling its output level from y’ to
2y’ requires doubling all input levels.
 Constant Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
constant returns-to-scale then
doubling its output level from y’ to
2y’ requires doubling all input levels.
u Total production cost doubles.
 Constant Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
constant returns-to-scale then
doubling its output level from y’ to
2y’ requires doubling all input levels.
u Total production cost doubles.
u Average production cost does not
change.
Decreasing Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
decreasing returns-to-scale then
doubling its output level from y’ to
2y’ requires more than doubling all
input levels.
Decreasing Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
decreasing returns-to-scale then
doubling its output level from y’ to
2y’ requires more than doubling all
input levels.
u Total production cost more than
doubles.
Decreasing Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
decreasing returns-to-scale then
doubling its output level from y’ to
2y’ requires more than doubling all
input levels.
u Total production cost more than
doubles.
u Average production cost increases.
 Increasing Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
increasing returns-to-scale then
doubling its output level from y’ to
2y’ requires less than doubling all
input levels.
 Increasing Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
increasing returns-to-scale then
doubling its output level from y’ to
2y’ requires less than doubling all
input levels.
u Total production cost less than
doubles.
 Increasing Returns-to-Scale and
Average Total Costs
u Ifa firm’s technology exhibits
increasing returns-to-scale then
doubling its output level from y’ to
2y’ requires less than doubling all
input levels.
u Total production cost less than
doubles.
u Average production cost decreases.
 Returns-to-Scale and Av. Total
Costs
$/output unit

AC(y) decreasing r.t.s.

constant r.t.s.

increasing r.t.s.

y
Returns-to-Scale and Total Costs

u What does this imply for the shapes

of total cost functions?
Returns-to-Scale and Total Costs
Av. cost increases with y if the firm’s
$ technology exhibits decreasing r.t.s.

c(2y’) Slope = c(2y’)/2y’

= AC(2y’).
Slope = c(y’)/y’
= AC(y’).
c(y’)

y’ 2y’ y
Returns-to-Scale and Total Costs
Av. cost increases with y if the firm’s
$ technology exhibits decreasing r.t.s.
c(y)
c(2y’) Slope = c(2y’)/2y’
= AC(2y’).
Slope = c(y’)/y’
= AC(y’).
c(y’)

y’ 2y’ y
Returns-to-Scale and Total Costs
Av. cost decreases with y if the firm’s
$ technology exhibits increasing r.t.s.
c(2y’)
Slope = c(2y’)/2y’
c(y’) = AC(2y’).
Slope = c(y’)/y’
= AC(y’).

y’ 2y’ y
Returns-to-Scale and Total Costs
Av. cost decreases with y if the firm’s
$ technology exhibits increasing r.t.s.
c(y)
c(2y’)
Slope = c(2y’)/2y’
c(y’) = AC(2y’).
Slope = c(y’)/y’
= AC(y’).

y’ 2y’ y
 Returns-to-Scale and Total Costs
Av. cost is constant when the firm’s
$ technology exhibits constant r.t.s.
c(2y’) c(y)
=2c(y’) Slope = c(2y’)/2y’
= 2c(y’)/2y’
= c(y’)/y’
c(y’)
so
AC(y’) = AC(2y’).

y’ 2y’ y
 Short-Run & Long-Run Total
Costs
u In the long-run a firm can vary all of
its input levels.
u Consider a firm that cannot change
its input 2 level from x2’ units.
u How does the short-run total cost of
producing y output units compare to
the long-run total cost of producing y
units of output?
 Short-Run & Long-Run Total
Costs
u Thelong-run cost-minimization
problem is xmin w1 x1 + w 2 x 2
,x ³0
1 2

subject to f (x1, x 2 ) = y.

u The short-run
� cost-minimization
problem is min w1 x1 + w 2 x¢2
x ³0 1 �
subject to f (x1, x¢2 ) = y.

�
 Short-Run & Long-Run Total
Costs
u The short-run cost-min. problem is the
long-run problem subject to the extra
constraint that x2 = x2’.
u If the long-run choice for x2 was x2’
then the extra constraint x2 = x2’ is not
really a constraint at all and so the
long-run and short-run total costs of
producing y output units are the same.
 Short-Run & Long-Run Total
Costs
u The short-run cost-min. problem is
therefore the long-run problem subject to
the extra constraint that x2 = x2’.
u But, if the long-run choice for x2 ¹ x2’
then the extra constraint x2 = x2’ prevents
the firm in this short-run from achieving
its long-run production cost, causing the
short-run total cost to exceed the long-
run total cost of producing y output units.
 Short-Run & Long-Run Total
Costs
y ¢¢¢
x2 Consider three output levels.
y ¢¢

y¢

x1
 Short-Run & Long-Run Total
Costs
y ¢¢¢ In the long-run when the firm
x2
is free to choose both x1 and
y ¢¢
x2, the least-costly input
y¢ bundles are ...

x1
 Short-Run & Long-Run Total
Costs
y ¢¢¢
x2 Long-run
y ¢¢ output
expansion
y¢ path
x ¢¢¢
2
x ¢¢2
x ¢2

x1¢ x1¢¢ x1¢¢¢ x1

 Short-Run & Long-Run Total
Costs
Long-run costs are:
y ¢¢¢ c( y ¢ ) = w 1x1¢ + w 2x ¢2
x2 Long-run c( y ¢¢ ) = w 1x1¢¢ + w 2x ¢¢¢
2
y ¢¢ output c( y ¢¢¢ ) = w 1x1¢¢¢+ w 2x ¢¢¢
2
expansion
y¢ path
x ¢¢¢
2
x ¢¢2
x ¢2

x1¢ x1¢¢ x1¢¢¢ x1

 Short-Run & Long-Run Total
Costs
u Now suppose the firm becomes
subject to the short-run constraint
that x1 = x1”.
 Short-Run & Long-Run Total
Costs
Long-run costs are:
y ¢¢¢ Short-run c( y ¢ ) = w 1x1¢ + w 2x ¢2
x2 output c( y ¢¢ ) = w 1x1¢¢ + w 2x ¢¢¢
2
y ¢¢ expansion
c( y ¢¢¢ ) = w 1x1¢¢¢+ w 2x ¢¢¢
2
path
y¢
x ¢¢¢
2
x ¢¢2
x ¢2

x1¢ x1¢¢ x1¢¢¢ x1

 Short-Run & Long-Run Total
Costs
Long-run costs are:
y ¢¢¢ Short-run c( y ¢ ) = w 1x1¢ + w 2x ¢2
x2 output c( y ¢¢ ) = w 1x1¢¢ + w 2x ¢¢¢
2
y ¢¢ expansion
c( y ¢¢¢ ) = w 1x1¢¢¢+ w 2x ¢¢¢
2
path
y¢
x ¢¢¢
2
x ¢¢2
x ¢2

x1¢ x1¢¢ x1¢¢¢ x1

 Short-Run & Long-Run Total
Costs
Long-run costs are:
y ¢¢¢ Short-run c( y ¢ ) = w 1x1¢ + w 2x ¢2
x2 output c( y ¢¢ ) = w 1x1¢¢ + w 2x ¢¢¢
2
y ¢¢ expansion
c( y ¢¢¢ ) = w 1x1¢¢¢+ w 2x ¢¢¢
2
path
y¢ Short-run costs are:
c s ( y ¢ ) > c( y ¢ )
x ¢¢¢
2
x ¢¢2
x ¢2

x1¢ x1¢¢ x1¢¢¢ x1

 Short-Run & Long-Run Total
Costs
Long-run costs are:
y ¢¢¢ Short-run c( y ¢ ) = w 1x1¢ + w 2x ¢2
x2 output c( y ¢¢ ) = w 1x1¢¢ + w 2x ¢¢¢
2
y ¢¢ expansion
c( y ¢¢¢ ) = w 1x1¢¢¢+ w 2x ¢¢¢
2
path
y¢ Short-run costs are:
c s ( y ¢ ) > c( y ¢ )
x ¢¢¢
2 c s ( y ¢¢ ) = c( y ¢¢ )
x ¢¢2
x ¢2

x1¢ x1¢¢ x1¢¢¢ x1

 Short-Run & Long-Run Total
Costs
Long-run costs are:
y ¢¢¢ Short-run c( y ¢ ) = w 1x1¢ + w 2x ¢2
x2 output c( y ¢¢ ) = w 1x1¢¢ + w 2x ¢¢¢
2
y ¢¢ expansion
c( y ¢¢¢ ) = w 1x1¢¢¢+ w 2x ¢¢¢
2
path
y¢ Short-run costs are:
c s ( y ¢ ) > c( y ¢ )
x ¢¢¢
2 c s ( y ¢¢ ) = c( y ¢¢ )
x ¢¢2
x ¢2

x1¢ x1¢¢ x1¢¢¢ x1

 Short-Run & Long-Run Total
Costs
Long-run costs are:
y ¢¢¢ Short-run c( y ¢ ) = w 1x1¢ + w 2x ¢2
x2 output c( y ¢¢ ) = w 1x1¢¢ + w 2x ¢¢¢
2
y ¢¢ expansion
c( y ¢¢¢ ) = w 1x1¢¢¢+ w 2x ¢¢¢
2
path
y¢ Short-run costs are:
c s ( y ¢ ) > c( y ¢ )
x ¢¢¢
2 c s ( y ¢¢ ) = c( y ¢¢ )
x ¢¢2 c s ( y ¢¢¢ ) > c( y ¢¢¢ )
x ¢2

x1¢ x1¢¢ x1¢¢¢ x1

 Short-Run & Long-Run Total
Costs
u Short-run total cost exceeds long-run
total cost except for the output level
where the short-run input level
restriction is the long-run input level
choice.
u This says that the long-run total cost
curve always has one point in
common with any particular short-
run total cost curve.
 Short-Run & Long-Run Total
Costs
A short-run total cost curve always has
$
one point in common with the long-run
total cost curve, and is elsewhere higher
than the long-run total cost curve.
cs(y)
c(y)
F=
w 2x ¢¢2
y¢ y ¢¢ y ¢¢¢ y