Intermediate

Microeconomics
Vivekananda Mukherjee
Department of Economics, Jadavpur University
Lecture 42
Summary
• For
  homogeneous production functions:
.
1. If CRS Example

if
Cost Function:
2. If IRS Example if
Cost Function:
3. If DRS Example if
Cost Function:
Summary (Contd.)
•  Properties of Homogeneous Production function:
Euler’s Theorem
,

• Definition and properties of Homothetic Production Function

 Derivation of Cost Function
 : Minimum cost of producing
 Min
 𝑥2
by choosing
subject to
and
for all

 𝑧
𝑥  ∗2  Max
w.r.t
 𝑞
´
𝑤  1
𝑤2
∗
 𝑥1  𝑥1
0
   interior solution for all must satisfy
An

•   order conditions:
First
for all (*)
.

Notice that, (*) implies for and :

(,

FOCs solve for and .

[Conditional/Derived Demand Function]

The strict quasi-concavity of the productiom function takes care of the second order
condition.
 Cost Function
 𝑥2
• 

𝑥  ∗2  𝑧

𝑤
 1 𝐶
  (𝑤 1 , 𝑤 2 ,q )   𝑞
𝑤2
∗
0  𝑥1  𝑥1

Unit Cost Function:

Choice of Technique
 𝑥2 𝑤
  𝑖

 𝑥
′ 𝑧  ′
2

𝑥  ∗2  𝑧

 𝑧 ′ ′
𝑤
 1
  𝑞  𝑥𝑖 ( 𝑤 𝑖 )
𝑤2
′
0  𝑥1  𝑥∗
1  𝑥1 0  𝑥𝑖
  Conditional Demand Function for input

Can never be positively sloped

Example:
Derivation of Conditional Demand Function and Cost Function for Cobb-Douglas Production Function

•Min
  by choosing
subject to
and for all

For an interior solution, FOCs

(1)
. (2)
Conditional Demand Functions
•.  
.

Cost Function
Cobb-Douglas: Return to Scale
  CRS 𝐶(𝑞)
  TC

𝐶  ( 1 ) 𝑞
 
𝐶(1)
 

𝐶(1)
 
1  𝑞  𝑞
 𝐶 ( 𝑞 ) =𝐶 ( 1 ) 𝑞

𝐶(1)
 
AC = MC

 𝑞
Cobb-Douglas: Return to Scale
  IRS 𝐶(𝑞)
 
TC

 𝑞

AC
MC
 𝑞
 Cobb-Douglas: Return to Scale
  DRS 𝐶(𝑞)
  TC

 𝑞

MC
AC

 𝑞
Cost function
 
•CRS:
 
.

How to derive ?  𝑥2

Min by choosing
subject to 𝑞=1
 

and for all

 𝛼  𝑤 1
𝛽 𝑤2
 𝑥1
Cost function
 
•CRS:
 
.

How to derive ?  𝑥2

Min by choosing
subject to
and for all 𝑞=1
 
 𝛽
??  𝑤 1
?? 𝑤2
𝛼   𝑥1
 All the returns to scale together in a technology?

•Consider
  the cost function of the following form:

MC
AC

𝑎 
  𝑏
𝐴𝐶( )
2𝑐

0  𝑏 𝑞 
2𝑐