Cost Minimization
‹A firm is a cost-minimizer if it
Chapter Twenty
Cost Minimization
Cost Minimization
‹ When the firm faces given input
prices w = (w1,w2,…,wn) the total cost
function will be written as
c(w1,…,wn,y).
The Cost-Minimization Problem
‹ Forgiven w1, w2 and y, the firm’s
cost-minimization problem is to
solve min w 1x1 + w 2x 2
x1 , x 2 ≥ 0
subject to f ( x1 , x 2 ) = y .
produces any given output level y ≥ 0
at smallest possible total cost.
‹ c(y) denotes the firm’s smallest
possible total cost for producing y
units of output.
‹ c(y) is the firm’s total cost function.
The Cost-Minimization Problem
‹ Consider a firm using two inputs to
make one output.
‹ The production function is
y = f(x1,x2).
‹ Take the output level y ≥ 0 as given.
‹ Given the input prices w1 and w2, the
cost of an input bundle (x1,x2) is
w1x1 + w2x2.
The Cost-Minimization Problem
‹ The levels x1*(w1,w2,y) and x1*(w1,w2,y)
in the least-costly input bundle are the
firm’s conditional demands for inputs
1 and 2.
‹ The (smallest possible) total cost for
producing y output units is therefore
c ( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y )
+ w 2x*2 ( w 1 , w 2 , y ).
1
 Conditional Input Demands
‹ Given w1, w2 and y, how is the least
costly input bundle located?
‹ And how is the total cost function
computed?
Iso-cost Lines
‹A curve that contains all of the input
bundles that cost the same amount
is an iso-cost curve.
‹ E.g., given w1 and w2, the $100 iso-
cost line has the equation
w 1x1 + w 2x 2 = 100.

Iso-cost Lines Iso-cost Lines

‹ Generally,
given w1 and w2, the x2
equation of the $c iso-cost line is
c” ≡ w1x1+w2x2
w 1x1 + w 2x 2 = c
i.e.
w1 c c’ ≡ w1x1+w2x2
x2 = − x1 + .
w2 w2 c’ < c”

‹ Slope is - w1/w2. x1

Iso-cost Lines The y’-Output Unit Isoquant

x2 Slopes = -w1/w2. x2
All input bundles yielding y’ units
c” ≡ w1x1+w2x2 of output. Which is the cheapest?

c’ ≡ w1x1+w2x2

c’ < c”
f(x1,x2) ≡ y’
x1 x1

2
The Cost-Minimization Problem The Cost-Minimization Problem
x2 x2
All input bundles yielding y’ units All input bundles yielding y’ units
of output. Which is the cheapest? of output. Which is the cheapest?

f(x1,x2) ≡ y’ f(x1,x2) ≡ y’
x1 x1

The Cost-Minimization Problem The Cost-Minimization Problem

x2 x2
All input bundles yielding y’ units All input bundles yielding y’ units
of output. Which is the cheapest? of output. Which is the cheapest?

x2*
f(x1,x2) ≡ y’ f(x1,x2) ≡ y’
x1 x1* x1

The Cost-Minimization Problem The Cost-Minimization Problem

At an interior cost-min input bundle: At an interior cost-min input bundle:
* * * *
x2 (a) f ( x1 , x 2 ) = y ′ x2 (a) f ( x1 , x 2 ) = y ′ and
(b) slope of isocost = slope of
isoquant

x2* x2*
f(x1,x2) ≡ y’ f(x1,x2) ≡ y’
x1* x1 x1* x1

3
 A Cobb-Douglas Example of Cost
The Cost-Minimization Problem
Minimization
At an interior cost-min input bundle:
* *
x2 (a) f ( x1 , x 2 ) = y ′ and ‹A firm’s Cobb-Douglas production
(b) slope of isocost = slope of function is
isoquant; i.e. y = f ( x1 , x 2 ) = x11/ 3x 22/ 3 .
w1 MP1
− = TRS = − at ( x*1 , x*2 ). ‹ Input prices are w1 and w2.
w2 MP2
‹ What are the firm’s conditional input
x2* demand functions?
f(x1,x2) ≡ y’
x1* x1

A Cobb-Douglas Example of Cost A Cobb-Douglas Example of Cost

Minimization Minimization
w1 x*
At the input bundle (x1*,x2*) which minimizes
* 1/ 3 * 2 / 3
(a) y = ( x1 ) ( x 2 ) (b) = 2 .
w 2 2x*1
the cost of producing y output units:
(a) y = ( x* ) 1/ 3 ( x* ) 2 / 3 and
1 2

(b)
w1 ∂ y / ∂ x1 ( 1 / 3 )( x*1 ) − 2 / 3 ( x*2 ) 2 / 3
− =− =−
w2 ∂ y / ∂ x2 ( 2 / 3 )( x*1 ) 1/ 3 ( x*2 ) −1/ 3
x*2
=− .
2x*1

A Cobb-Douglas Example of Cost A Cobb-Douglas Example of Cost

Minimization Minimization
w1 x* w1 x*
* 1/ 3 * 2 / 3
(a) y = ( x1 ) ( x 2 ) (b) = 2 . * 1/ 3 * 2 / 3
(a) y = ( x1 ) ( x 2 ) (b) = 2 .
w 2 2x*1 w 2 2x*1
* 2w 1 * * 2w 1 *
From (b), x 2 = x1 . From (b), x 2 = x1 .
w2 w2
Now substitute into (a) to get
2/ 3
⎛ 2w 1 * ⎞
y = ( x*1 ) 1/ 3 ⎜ x1 ⎟
⎝ w2 ⎠

4
 A Cobb-Douglas Example of Cost A Cobb-Douglas Example of Cost
Minimization Minimization
w1 x* w1 x*
* 1/ 3 * 2 / 3
(a) y = ( x1 ) ( x 2 ) (b) = 2 . * 1/ 3 * 2 / 3
(a) y = ( x1 ) ( x 2 ) (b) = 2 .
w 2 2x*1 w 2 2x*1
* 2w 1 * * 2w 1 *
From (b), x 2 = x1 . From (b), x 2 = x1 .
w2 w2
Now substitute into (a) to get Now substitute into (a) to get
2/ 3 2/ 3 2/ 3 2/ 3
⎛ 2w 1 * ⎞ ⎛ 2w 1 ⎞ ⎛ 2w 1 * ⎞ ⎛ 2w 1 ⎞
y = ( x*1 ) 1/ 3 ⎜ x1 ⎟ =⎜ ⎟ x*1 . y = ( x*1 ) 1/ 3 ⎜ x1 ⎟ =⎜ ⎟ x*1 .
⎝ w2 ⎠ ⎝ w2 ⎠ ⎝ w2 ⎠ ⎝ w2 ⎠
2/ 3
* ⎛ w ⎞
So x 1 = ⎜ 2 ⎟ y is the firm’s conditional
⎝ 2w 1 ⎠
demand for input 1.

A Cobb-Douglas Example of Cost A Cobb-Douglas Example of Cost

Minimization Minimization
2/ 3
2w 1 * * ⎛ w ⎞
Since x*2 = x and x 1 = ⎜ 2 ⎟ y So the cheapest input bundle yielding y
w2 1 ⎝ 2w 1 ⎠
output units is
2/ 3 1/ 3
2w 1 ⎛ w 2 ⎞ ⎛ 2w 1 ⎞
x*2 = ⎜ ⎟
w 2 ⎝ 2w 1 ⎠
y=⎜
⎝ w2 ⎠
⎟ y (x*1 ( w 1 , w 2 , y ), x*2 ( w 1 , w 2 , y ))
is the firm’s conditional demand for input 2. ⎛ ⎛ w ⎞ 2 / 3 ⎛ 2 w ⎞ 1/ 3 ⎞
= ⎜⎜ 2 ⎟ y, ⎜ 1
⎟ y⎟ .
⎜ ⎝ 2w 1 ⎠ ⎝ w 2 ⎠
⎟
⎝ ⎠

Conditional Input Demand Curves Conditional Input Demand Curves

y
Fixed w1 and w2. Fixed w1 and w2.
x2 x2

y′

y x*2 ( y′ ) x*2

y′′′ y′′′
y′′ x*2 ( y′ ) y′′ y′
y′ y′
x1 x1
x*1 ( y′ ) x*1 ( y′ ) x*1

5
 Conditional Input Demand Curves Conditional Input Demand Curves
y y
Fixed w1 and w2. Fixed w1 and w2.
x2 x2 y′′′
y′′ y′′
y′ y′

y x*2 ( y′ ) x*2 y x*2 ( y′ ) x*2 ( y′′′ ) x*2

x*2 ( y′′ ) x*2 ( y′′′ )
*
x 2 ( y′′ )
y′′′
x*2 ( y′′ ) x*2 ( y′′ )
y′′′ y′′ y′′′ y′′
x*2 ( y′ ) y′′ x*2 ( y′ ) y′′
y′ y′
y′ y′
x1 x1
x*1 ( y′ ) x*1 ( y′ ) x*1 x*1 ( y′ ) x*1 ( y′′′ ) x*1 ( y′ ) x*1 ( y′′′ ) x*1
x*1 ( y′′ ) x*1 ( y′′ ) x*1 ( y′′ ) x*1 ( y′′ )

Conditional Input Demand Curves Conditional Input Demand Curves

y y Cond. demand
Fixed w1 and w2. Fixed w1 and w2. for
x2 y′′′ x2 y′′′ input 2
y′′ y′′
output output
y′ y′
expansion expansion
path y x*2 ( y′ ) x*2 ( y′′′ ) x*2 path y x*2 ( y′ ) x*2 ( y′′′ ) x*2
x*2 ( y′′′ ) x*2 ( y′′ ) x*2 ( y′′′ ) x*2 ( y′′ )
y′′′ y′′′ Cond.
x*2 ( y′′ ) x*2 ( y′′ )
y′′′ y′′ y′′′ y′′ demand
x*2 ( y′ ) y′′ x*2 ( y′ ) y′′ for
y′ y′
y′ y′ input 1
x1 x1
x*1 ( y′ ) x*1 ( y′′′ ) x*1 ( y′ ) x*1 ( y′′′ ) x*1 x*1 ( y′ ) x*1 ( y′′′ ) x*1 ( y′ ) x*1 ( y′′′ ) x*1
x*1 ( y′′ ) x*1 ( y′′ ) x*1 ( y′′ ) x*1 ( y′′ )

A Cobb-Douglas Example of Cost A Cobb-Douglas Example of Cost

Minimization Minimization
For the production function So the firm’s total cost function is
y = f ( x1 , x 2 ) = x11 / 3x 22 / 3 c ( w 1 , w 2 , y ) = w 1x *1 ( w 1 , w 2 , y ) + w 2 x *2 ( w 1 , w 2 , y )
the cheapest input bundle yielding y output
units is
(x*1 ( w 1 , w 2 , y ), x*2 ( w 1 , w 2 , y ))
⎛ ⎛ w ⎞ 2 / 3 ⎛ 2 w ⎞ 1/ 3 ⎞
= ⎜⎜ 2 ⎟ y, ⎜ 1
⎟ y⎟ .
⎜ ⎝ 2w 1 ⎠ ⎝ w ⎠ ⎟
⎝ 2 ⎠

6
 A Cobb-Douglas Example of Cost A Cobb-Douglas Example of Cost
Minimization Minimization
So the firm’s total cost function is So the firm’s total cost function is
c ( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y ) + w 2 x*2 ( w 1 , w 2 , y ) c ( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y ) + w 2 x*2 ( w 1 , w 2 , y )
2/ 3 1/ 3 2/ 3 1/ 3
⎛ w ⎞ ⎛ 2w 1 ⎞ ⎛ w ⎞ ⎛ 2w 1 ⎞
= w1⎜ 2 ⎟ y + w 2⎜ ⎟ y = w1⎜ 2 ⎟ y + w 2⎜ ⎟ y
⎝ 2w 1 ⎠ ⎝ w2 ⎠ ⎝ 2w 1 ⎠ ⎝ w2 ⎠
2/ 3
⎛ 1⎞
=⎜ ⎟ w 11/ 3 w 22 / 3 y + 21/ 3 w 11 / 3 w 22 / 3 y
⎝ 2⎠

A Cobb-Douglas Example of Cost A Perfect Complements Example of

Minimization Cost Minimization
So the firm’s total cost function is ‹ The firm’s production function is
c ( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y ) + w 2 x*2 ( w 1 , w 2 , y ) y = min{ 4 x 1 , x 2 }.
2/ 3 1/ 3
⎛ w ⎞ ⎛ 2w 1 ⎞ ‹ Input prices w1 and w2 are given.
= w1⎜ 2 ⎟ y + w2⎜ ⎟ y
⎝ 2w 1 ⎠ ⎝ w2 ⎠
‹ What are the firm’s conditional
2/ 3 demands for inputs 1 and 2?
⎛ 1⎞
=⎜ ⎟ w 11/ 3 w 22 / 3 y + 21/ 3 w 11/ 3 w 22 / 3 y
⎝ ⎠
2 ‹ What is the firm’s total cost
1/ 3 function?
⎛ w w2⎞
= 3⎜⎜ 1 2 ⎟⎟ y.
⎝ 4 ⎠

A Perfect Complements Example of A Perfect Complements Example of

Cost Minimization Cost Minimization
x2 x2
4x1 = x2 4x1 = x2

min{4x1,x2} ≡ y’ min{4x1,x2} ≡ y’

x1 x1

7
A Perfect Complements Example of A Perfect Complements Example of
Cost Minimization Cost Minimization
x2 x2
4x1 = x2 Where is the least costly 4x1 = x2 Where is the least costly
input bundle yielding input bundle yielding
y’ output units? y’ output units?

min{4x1,x2} ≡ y’ x2* = y min{4x1,x2} ≡ y’

x1 x1* x1
= y/4

A Perfect Complements Example of A Perfect Complements Example of

Cost Minimization Cost Minimization
The firm’s production function is The firm’s production function is
y = min{ 4 x 1 , x 2 } y = min{ 4 x 1 , x 2 }
and the conditional input demands are and the conditional input demands are
y y
x*1 ( w 1 , w 2 , y ) = *
and x 2 ( w 1 , w 2 , y ) = y . x*1 ( w 1 , w 2 , y ) = *
and x 2 ( w 1 , w 2 , y ) = y .
4 4
So the firm’s total cost function is
c ( w 1 , w 2 , y ) = w 1x *1 ( w 1 , w 2 , y )
+ w 2 x*2 ( w 1 , w 2 , y )

A Perfect Complements Example of

Average Total Production Costs
Cost Minimization
The firm’s production function is ‹ For positive output levels y, a firm’s
y = min{ 4 x 1 , x 2 } average total cost of producing y
and the conditional input demands are units is
y c( w 1 , w 2 , y )
x*1 ( w 1 , w 2 , y ) = *
and x 2 ( w 1 , w 2 , y ) = y . AC( w 1 , w 2 , y ) = .
4 y
So the firm’s total cost function is
c ( w 1 , w 2 , y ) = w 1x*1 ( w 1 , w 2 , y )
+ w 2 x*2 ( w 1 , w 2 , y )
y ⎛w ⎞
= w 1 + w 2y = ⎜ 1 + w 2 ⎟ y.
4 ⎝ 4 ⎠

8

Returns-to-Scale and Av. Total Costs
‹ The returns-to-scale properties of a
firm’s technology determine how
average production costs change with
output level.
‹ Our firm is presently producing y’
output units.
‹ How does the firm’s average
production cost change if it instead
produces 2y’ units of output?
Constant Returns-to-Scale and Average
Total Costs
‹ Ifa firm’s technology exhibits
constant returns-to-scale then
doubling its output level from y’ to
2y’ requires doubling all input levels.
‹ Total production cost doubles.
Decreasing Returns-to-Scale and
Average Total Costs
‹ Ifa firm’s technology exhibits
decreasing returns-to-scale then
doubling its output level from y’ to
2y’ requires more than doubling all
input levels.
Constant Returns-to-Scale and Average
Total Costs
‹ Ifa firm’s technology exhibits
constant returns-to-scale then
doubling its output level from y’ to
2y’ requires doubling all input levels.
Constant Returns-to-Scale and Average
Total Costs
‹ Ifa firm’s technology exhibits
constant returns-to-scale then
doubling its output level from y’ to
2y’ requires doubling all input levels.
‹ Total production cost doubles.
‹ Average production cost does not
change.
Decreasing Returns-to-Scale and
Average Total Costs
‹ Ifa firm’s technology exhibits
decreasing returns-to-scale then
doubling its output level from y’ to
2y’ requires more than doubling all
input levels.
‹ Total production cost more than
doubles.
9
 Decreasing Returns-to-Scale and
Average Total Costs
‹ Ifa firm’s technology exhibits
decreasing returns-to-scale then
doubling its output level from y’ to
2y’ requires more than doubling all
input levels.
‹ Total production cost more than
doubles.
‹ Average production cost increases.
Increasing Returns-to-Scale and
Average Total Costs
‹ Ifa firm’s technology exhibits
increasing returns-to-scale then
doubling its output level from y’ to
2y’ requires less than doubling all
input levels.
‹ Total production cost less than
doubles.
Returns-to-Scale and Av. Total Costs
$/output unit
AC(y) decreasing r.t.s.
constant r.t.s.
increasing r.t.s.
Increasing Returns-to-Scale and
Average Total Costs
‹ Ifa firm’s technology exhibits
increasing returns-to-scale then
doubling its output level from y’ to
2y’ requires less than doubling all
input levels.
Increasing Returns-to-Scale and
Average Total Costs
‹ Ifa firm’s technology exhibits
increasing returns-to-scale then
doubling its output level from y’ to
2y’ requires less than doubling all
input levels.
‹ Total production cost less than
doubles.
‹ Average production cost decreases.
Returns-to-Scale and Total Costs
‹ What does this imply for the shapes
of total cost functions?
10
 Returns-to-Scale and Total Costs Returns-to-Scale and Total Costs
Av. cost increases with y if the firm’s Av. cost increases with y if the firm’s
$ technology exhibits decreasing r.t.s. $ technology exhibits decreasing r.t.s.
c(y)
c(2y’) Slope = c(2y’)/2y’ c(2y’) Slope = c(2y’)/2y’
= AC(2y’). = AC(2y’).
Slope = c(y’)/y’ Slope = c(y’)/y’
= AC(y’). = AC(y’).
c(y’) c(y’)

y’ 2y’ y y’ 2y’ y

Returns-to-Scale and Total Costs Returns-to-Scale and Total Costs

Av. cost decreases with y if the firm’s Av. cost decreases with y if the firm’s
$ technology exhibits increasing r.t.s. $ technology exhibits increasing r.t.s.
c(y)
c(2y’) c(2y’)
Slope = c(2y’)/2y’ Slope = c(2y’)/2y’
c(y’) = AC(2y’). c(y’) = AC(2y’).
Slope = c(y’)/y’ Slope = c(y’)/y’
= AC(y’). = AC(y’).

y’ 2y’ y y’ 2y’ y

Returns-to-Scale and Total Costs Short-Run & Long-Run Total Costs

Av. cost is constant when the firm’s
$ technology exhibits constant r.t.s.
c(y) ‹ In the long-run a firm can vary all of
c(2y’)
=2c(y’) its input levels.
Slope = c(2y’)/2y’
= 2c(y’)/2y’ ‹ Consider a firm that cannot change
= c(y’)/y’ its input 2 level from x2’ units.
c(y’)
so ‹ How does the short-run total cost of
AC(y’) = AC(2y’). producing y output units compare to
the long-run total cost of producing y
y’ 2y’ y units of output?

11
Short-Run & Long-Run Total Costs
‹ The long-run cost-minimization
problem is min w 1x1 + w 2x 2
x1 , x 2 ≥ 0
subject to f ( x1 , x 2 ) = y .
Short-Run & Long-Run Total Costs
‹ The short-run cost-min. problem is the
long-run problem subject to the extra
constraint that x2 = x2’.
‹ If the long-run choice for x2 was x2’

‹ The short-run cost-minimization

then the extra constraint x2 = x2’ is not
problem is min w 1x1 + w 2x ′2 really a constraint at all and so the
x1 ≥ 0 long-run and short-run total costs of
subject to f ( x1 , x ′2 ) = y . producing y output units are the same.

Short-Run & Long-Run Total Costs Short-Run & Long-Run Total Costs
y ′′′
‹ The short-run cost-min. problem is x2 Consider three output levels.
therefore the long-run problem subject y ′′
to the extra constraint that x2 = x2”.
‹ But, if the long-run choice for x2 ≠ x2” y′
then the extra constraint x2 = x2”
prevents the firm in this short-run from
achieving its long-run production cost,
causing the short-run total cost to
exceed the long-run total cost of x1
producing y output units.

Short-Run & Long-Run Total Costs Short-Run & Long-Run Total Costs
y ′′′ In the long-run when the firm y ′′′
x2 x2 Long-run
is free to choose both x1 and
y ′′ y ′′ output
x2, the least-costly input
expansion
y′ bundles are ... y′ path
x ′′′
2
x ′′2
x ′2

x1 x1′ x1′′ x1′′′ x1

12
Short-Run & Long-Run Total Costs Short-Run & Long-Run Total Costs
Long-run costs are:
y ′′′ c( y ′ ) = w 1x1′ + w 2x ′2
x2 Long-run ‹ Now suppose the firm becomes
c( y ′′ ) = w 1x1′′ + w 2x ′′′
y ′′ output
2
subject to the short-run constraint
c( y ′′′ ) = w 1x1′′′+ w 2x ′′′
2
expansion that x2 = x2”.
y′ path
x ′′′
2
x ′′2
x ′2

x1′ x1′′ x1′′′ x1

Short-Run & Long-Run Total Costs Short-Run & Long-Run Total Costs
Long-run costs are: Long-run costs are:
y ′′′ Short-run c( y ′ ) = w 1x1′ + w 2x ′2 y ′′′ Short-run c( y ′ ) = w 1x1′ + w 2x ′2
x2 output x2 output
c( y ′′ ) = w 1x1′′ + w 2x ′′′ c( y ′′ ) = w 1x1′′ + w 2x ′′′
y ′′ expansion 2 y ′′ expansion 2
c( y ′′′ ) = w 1x1′′′+ w 2x ′′′
2 c( y ′′′ ) = w 1x1′′′+ w 2x ′′′
2
path path
y′ y′
x ′′′
2 x ′′′
2
x ′′2 x ′′2
x ′2 x ′2

x1′ x1′′ x1′′′ x1 x1′ x1′′ x1′′′ x1

Short-Run & Long-Run Total Costs Short-Run & Long-Run Total Costs
Long-run costs are: Long-run costs are:
y ′′′ Short-run c( y ′ ) = w 1x1′ + w 2x ′2 y ′′′ Short-run c( y ′ ) = w 1x1′ + w 2x ′2
x2 output x2 output
c( y ′′ ) = w 1x1′′ + w 2x ′′′ c( y ′′ ) = w 1x1′′ + w 2x ′′′
y ′′ expansion 2 y ′′ expansion 2
c( y ′′′ ) = w 1x1′′′+ w 2x ′′′
2 c( y ′′′ ) = w 1x1′′′+ w 2x ′′′
2
path path
y′ Short-run costs are: y′ Short-run costs are:
c s ( y ′ ) > c( y ′ ) c s ( y ′ ) > c( y ′ )
x ′′′
2 x ′′′
2 c s ( y ′′ ) = c( y ′′ )
x ′′2 x ′′2
x ′2 x ′2

x1′ x1′′ x1′′′ x1 x1′ x1′′ x1′′′ x1

13
Short-Run & Long-Run Total Costs Short-Run & Long-Run Total Costs
Long-run costs are: Long-run costs are:
y ′′′ Short-run c( y ′ ) = w 1x1′ + w 2x ′2 y ′′′ Short-run c( y ′ ) = w 1x1′ + w 2x ′2
x2 output x2 output
c( y ′′ ) = w 1x1′′ + w 2x ′′′ c( y ′′ ) = w 1x1′′ + w 2x ′′′
y ′′ expansion 2 y ′′ expansion 2
c( y ′′′ ) = w 1x1′′′+ w 2x ′′′
2 c( y ′′′ ) = w 1x1′′′+ w 2x ′′′
2
path path
y′ Short-run costs are: y′ Short-run costs are:
c s ( y ′ ) > c( y ′ ) c s ( y ′ ) > c( y ′ )
x ′′′
2 c s ( y ′′ ) = c( y ′′ ) x ′′′
2 c s ( y ′′ ) = c ( y ′′ )
x ′′2 x ′′2 c s ( y ′′′ ) > c( y ′′′ )
x ′2 x ′2

x1′ x1′′ x1′′′ x1 x1′ x1′′ x1′′′ x1

Short-Run & Long-Run Total Costs Short-Run & Long-Run Total Costs
A short-run total cost curve always has
$
‹ Short-run total cost exceeds long-run one point in common with the long-run
total cost curve, and is elsewhere higher
total cost except for the output level
than the long-run total cost curve.
where the short-run input level
restriction is the long-run input level cs(y)
choice. c(y)
‹ This says that the long-run total cost F=
curve always has one point in w 2x ′′2
common with any particular short- y′ y ′′ y ′′′ y
run total cost curve.

14