L16

1
L16

• Cost Functions

2
Producers

• Producers have technology
• Assumptions
• They maximize profit
• They are price takers

3
Profit Maximization

• DRS secrets of happiness
• CRS problem problem well defined only for
• IRS profit either zero or infinity

4
Cost Minimization

• Profit maximization two stages
• Managers how much to sell
• Engineers How to produce it with
• Today second stage - cost minimization!
• Technology input prices cost function
• Geometrically Isoquants and Isoprofit c

5
Technical Rate of Substitution (TRS)
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Technical Rate of Substitution (TRS)
7
Secret of Happiness
8
Example
9
Profit Maximization and Cost Minimization
Profit Maximization (DRS)
Cost Minimization?
10
Arbitrary y
11
DRS and Cost Function
12
Constant Returns to Scale