cost function

Solution Preview

Hello!

Question 2
Since there are are 5 (fixed) assembly machines installed at the plant, the production function becomes:

q = 5*5*L
q = 25*L

In order to find the cost function, we must find out how many teams are needed to build a single engine. This is easily done by isolating L from the production function:

L = q/25

Now, the cost function will be:

Cost(q) = 2000*q + 5000*L + 50000

The 2000*q term is the cost of the raw materials. The 5000*L term is what the firm pays in wages ($5000 per team). Finally, the 50000 comes from the fact that there are 5 machines and each machine costs $10000.

Replacing L as a function of q in this equation, as we found earlier, gives:

Cost(q) = 2000*q + 5000*q/25 + 50000
Cost(q) = 2000*q + 200*q + 50000
Cost(q) = 2200*q + 50000

Notice that due to the form of the production function, there are no diminishing returns to labor; so the cost function is linear with respect to q.

Average cost is simply calculated as Cost/q. In this case we get:

Avg Cost = 2200 + 50000/q

Marginal cost is calculated as the first derivative of Cost with respect to q. This gives:

Marginal cost = 2200

As you can see, the marginal cost is constant ...