Formulas

Average product of labor:

AP L =

AP K =

Average product of capital:

Marginal product of labor:

MP L=

Marginal product of capital:

VMP L=w

VMP K =r , where

Q
L

Q
K

Q
L

MP K =

Q
K

, where VMP L=P MP L

VMP K =P MP K

Linear: Q=F ( K , L )=aK+ bL

o Marginal products:
o Average products:

MP K =a
AP K =

and

aK + bL
K

Leontief: Q=F ( K , L )=min {aK , bL }

a b
Cobb-Douglas: Q=F ( K , L )=K L

MP L=b
and

AP L =

aK +bL
L

Marginal Products:

MP K =a K

a1

Marginal Product:

MP L=b K L

Average products:

AP K =

K a Lb
K

and

-1

AP L =

Formulas
Cost-minimizing input rule
MP L MP K
=
w
r

or
MP L w
=
MP K r

Total Cost:

TC ( Q )=FC+VC ( Q )

FC
Average fixed: AFC = Q

Average variable costs:

Average total cost:

AVC =

ATC=

Economies of Scope if:

Cost Complementarity if:

VC ( Q )
Q

C (Q)
Q

f > aQ1Q2
a< 0

Four-firm concentration ratio:

K a Lb
L

C 4=

S 1+ S 2+ S 3+ S 4
ST

Herfindahl-Hirschman index (HHI):

N

HHI =10,000
i=1

Si
ST

( )

Formulas
Rothschild index
o

R=

ET
EF

Lerner index
o

L=

PMC
P

Mark up
o

P=

1
( 1L
) MC

- Mark up =

Monopoly
o

MR=P

[ ]
1+ E
E

For a Linear Demand Function:

o MR ( Q )=a+ 2bQ

Multi-plant Output Rule

o Total Output:

1
( 1L
)

Q=Q 1 +Q 2
o
o Marginal Cost
o MC 1 ( Q1 ) / MC 2 ( Q2 )

o Profit Maximizing Rule

o MR ( Q )=MC 1 ( Q1 )
o

MR ( Q )=MC 2 ( Q2 )

Profit-maximizing advertising-to-sales ratio is:

o

E
A
= Q, A
R EQ , P

Formulas
Oligopoly
Cournot linear (inverse) demand function
o P=ab ( Q1 +Q2 )

Cournot MR
o MR1 (Q1,Q2) = a bQ2 2bQ1
o MR2 (Q1, Q2) = a bQ1 - 2bQ2

Cournot reactions functions are:

o

Q1=r 1 ( Q2 )=

ac 1 1
Q2
2b
2

Q2=r 2 ( Q1 )=

ac 2 1
Q
2b 2 1

Stackelberg linear (inverse) demand function

o P=ab ( Q1 +Q2 )

o Cost functions:
o C1 ( Q1 )=c1 Q1
o

C2 ( Q2 )=c 2 Q2 .

o The follower sets output according to the reaction function

o

Q2=r 2 ( Q1 )=

ac 2 1
Q1
2b
2

o The leaders output is

o

Q 1=

a+c 22 c 1
2b

Bertrand Oligopoly
o P1=P2=MC