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Cost minimization
Exercises of Microeconomics
Tramontana
Exercises Micro
Prot Function
Cost minimization
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
and
Tramontana
i00 (wi ) 0 .
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
We have seen that the demand for a factor only depends on its
price. So, the marginal product of each factor must only be a
function of the amount of the factor itself. It follows that:
f (x , x
1
) = g1 (x1 ) + g2 (x2 ).
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
Exercise 3.2
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
Solution
Demand function and supply function come from the rst order
condition:
from which we have that:
p /x = w ,
but given that the rm may always choice x = 0 to avoid negative
prots, we have:
(p , w ) = max {p ln(p /w ) p , 0} .
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
3.1
3.2
3.3
3.4
3.5
Exercise 3.3
p
w
x
p
a w
x
a
=0
=0
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
3.1
3.2
3.3
3.4
3.5
Solution
We have:
p
w
p
x =a
w
x
= a1
p
(p , w , w ) = p a ln a
w
"
Tramontana
p
+ a ln a
w
2
Exercises Micro
a1 a2
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
3.1
3.2
3.3
3.4
3.5
Exercise 3.4
pa x
pa x
1
a1
1
a2
1
1
x
x
2
2
2
1
w1 = 0
w2 = 0
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
3.1
3.2
3.3
3.4
3.5
Solution
w
pa
2 =
! a1
1a1
a2
pa
w
pa
! a1
a2 1
1a1
a2
w2 = 0
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
3.1
3.2
3.3
3.4
3.5
Solution
w
pa
2
a2
w
pa
a2
1 +a2 1
!a
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
3.1
3.2
3.3
3.4
3.5
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
3.1
3.2
3.3
3.4
3.5
Exercise 3.5
The important note to start the exercise is that the rm will never
use dierent amounts of inputs to produce a certain level of output.
In fact, if not the rm may reduce the amount of the input that is
more used and still produce the same level of output. So we can
assume that:
= x2
f (x , x
1
Tramontana
) = x1a
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
3.1
3.2
3.3
3.4
3.5
Solution
px
a
1
w1 x1 w2 x2
pax
(w 1 + w 2 ) = 0
+ w2
(a1)
pa
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Exercise 4.3
2
1
The right way to calculate how much the rm should produce with
each plant, consists in equating the marginal costs, obtaining:
=1
which means that if the rm is producing one unit of output with
the rst plant, it is indierent to produce a little bit more with one
plant or the other one.
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Solution
Note that the marginal costs of the second plant are xed and equal
to 1, while the marginal costs of the rst plant are lower (resp.
higher) than 1 if the production is lower (resp. higher) than 1.
Putting together these facts you have the cost function:
y /2
if y < 1
y 1/2 if y > 1 ,
where y 1/2 is obtained considering y = y + y that is
y = y y = y 1.
c (y ) =
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
4.3
4.4
4.6
4.7
4.8
Exercise 4.4
A rm has two plants. One plant produces output according to the
production function x x . The other plant has a production
function x x . What is the cost function for this technology?
a
1
b
1
c (w , y ) = min
w x +w x
1, 2
such that x x = y
x
Tramontana
a
1
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
4.3
4.4
4.6
4.7
4.8
Solution
minw x + w y 1a x
1
x1
a
1
a
w y 1a x 1a = 0
1a
that permit us to obtain the conditional demand for factor 1:
1
x (w , w , y ) =
1
Tramontana
a w
1a w
1a
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
4.3
4.4
4.6
4.7
4.8
Solution
x (w , w , y ) =
2
a w
1a w
a
c (w , w , y )
1
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Solution
Given that the marginal costs are xed, the rm will always use the
plant with lower marginal costs.
That is:
c (y ) = min {A, B } y .
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
4.3
4.4
4.6
4.7
4.8
Exercise 4.6
MC (y
1
) = MC2 (y2 )
4y2 = y1
1
and by using y = y + y :
1
4
5
1
5
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Solution
c (y ) = 2 y .
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
4.3
4.4
4.6
4.7
4.8
Exercise 4.7
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Solution
Tramontana
Exercises Micro
Prot Function
Cost minimization
Exercise
Exercise
Exercise
Exercise
Exercise
4.3
4.4
4.6
4.7
4.8
Outline
1
Prot Function
Exercise 3.1
Exercise 3.2
Exercise 3.3
Exercise 3.4
Exercise 3.5
Cost minimization
Exercise 4.3
Exercise 4.4
Exercise 4.6
Exercise 4.7
Exercise 4.8
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
4.3
4.4
4.6
4.7
4.8
Exercise 4.8
s .t . x x
1
=y
Tramontana
Exercises Micro
Exercise
Exercise
Exercise
Exercise
Exercise
Prot Function
Cost minimization
4.3
4.4
4.6
4.7
4.8
Solution
We have that:
y =4=x
+ x2 = 2
and nally:
y =4
Tramontana
Exercises Micro