1)Describe the cost function and explain the difference between a short-run and
ID: 1169136 • Letter: 1
Question
1)Describe the cost function and explain the difference between a short-run and a long-run cost function.
2) Describe the elements of a cost schedule which can be derived total, fixed, and variable costs.
3) Compare and contrast the short-run cost function and the long-run cost function and explain why economies of scale is considered to be a long-run phenomenon.
4)Use the tools of calculus to derive the short-term average cost and average variable cost functions from the total cost function.
5)Describe the various forms of production functions that are used in statistical estimation of these functions.
Explanation / Answer
(1) The cost function is the relationship between a firm's output and the costs associated with producing that level of output.
A short run cost function is based on the premise that in short run, some factors of production are fixed in supply and their usage cannot be increased on basis of output produced. However, in the long run, all factors are variable and can be flexibly used depending on how much output is produced.
Therefore, short run cost curves are generally steeper than long run cost curves.
(2)
Total cost has two parts: Variable costs and fixed costs.
Variable costs vary as per output produced, and is a function of output produced. But fixed costs are unchanged over a range of output.
It is to be noted that, fixed costs are not fixed at any amount of output the firm produces. For example, total fixed costs are $10,000 when output is between 100 to 125 units, but total fixed costs are $12,000 when output produced ranges between 126 to 150 units.
Some cost elements are semi-variable (or semi-fixed) in that a portion of these costs are fixed while the second portion is variable. An example is telephone bill. A minimum monthly rental is the fixed cost component and the call charge over and above this limit varies with number of calls made.
NOTE: Out of 5 questions, the first 2 are answered.
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