Explore BrainMass
Share

Explore BrainMass

    cost function

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    I need to define the cost function of a firm given the production function, rent and labor costs. Also about the equation that would minimize costs and the respective ratio.

    © BrainMass Inc. brainmass.com October 9, 2019, 5:21 pm ad1c9bdddf
    https://brainmass.com/economics/demand-supply/cost-function-54911

    Attachments

    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 ...

    Solution Summary

    This job defines the cost function of a firm given the production function, rent and labor costs.

    $2.19