Implications for the shape of cost function, Managerial Economics

Assignment Help:

Q. Implications for the shape of cost function?

A cost function is also a mathematical relationship, one which relates the expenses an organisation incurs on the quantity of output it generates and to the unit prices it pays. Arithmetically, let E denote the expense an organisation incurs in production of output quantity Y when it pays unit prices (p1... pn) for the inputs it uses. Then cost function  C(y, p1, ...,  pn) describes the minimum expenditure essential to produce output quantity Y when input unit prices are  (p1,...,  pn), given the technology in use and so E ≥ C(y, p1,...,pn). A cost function is an increasing function of (y, p1,..., pn), though the degrees to which minimum cost increases with an increase in the quantity of output produced or in any input price relies on the aspects describing the structure of production technology. For illustration, scale economies enable output to expand faster than input usage. Or we can say, proportionate increase in output is larger than proportionate increase in inputs. Such a situation is also referred as elasticity of production in relation to inputs being greater than one scale economies so create an incentive for large-scale production and by analogous reasoning scale diseconomies create a technological deterrent to large-scale production. For another instance, if a pair of inputs is a close substitute and unit price of one of the inputs increases, resulting increase in cost is less than if two inputs were poor complements orsubstitutes. Lastly, if wastage in the organisation causes actual output to fall short of maximum possible output or if inputs are misallocated in light of their respective unit prices, then actual cost exceeds minimum cost; both technical as well as allocative inefficiency are expensive.

As these illustrations suggest, under fairly general conditions shape of the cost function is a mirror image of shape of the production function. So the cost function and production function normally afford equivalent information concerning the structure of production technology. This equivalence relationship between cost functions and production functions is called 'duality' and it states that one of the two functions has certain aspects if and only if, the other has certain aspects. Such a duality relationship has some significant implications. Since production function and cost function are based on different data, duality allows us to use either function as the basis of an economic analysis of production, without fear of attaining conflicting inferences. Theoretical properties of associated input demand and output supply equations may be inferred from either theoretical properties of the production function or more easily for those of the dual cost function.


Related Discussions:- Implications for the shape of cost function

What do you mean by legal monopoly, Q. What do you mean by Legal Monopoly? ...

Q. What do you mean by Legal Monopoly? Legal Monopoly: Some monopolies are engendered and protected under various laws. Inventors of new processes, devices or articles attain

Economic effects of taxation, ECONOMIC EFFECTS OF TAXATION a.  A det...

ECONOMIC EFFECTS OF TAXATION a.  A deterrent to work Heavy direct taxation, especially when closely linked to current earnings, can act as a serious check to production

how many push mowers will ann rent, Ann owns a lawn-mowing company. She ha...

Ann owns a lawn-mowing company. She has 400 lawns she requires to cut every week. Her weekly revenue from these 400 lawns is $20,000. Given an 18-inch-deck push mower, a laborer ca

Statistical signigicance, A study of 86 savings and loan associations in si...

A study of 86 savings and loan associations in six northwestern states yielded the following cost function. I''ve been given the following data; C=2.38- .006153Q1 + .000005359Q2 +

Scarcity and oppurtunity cost, define scarcity and oppurtunity cost.show ho...

define scarcity and oppurtunity cost.show how these concepts are useful in managerial decision making

Importance of cross elasticity, Importance of Cross Elasticity Knowled...

Importance of Cross Elasticity Knowledge of cross elasticity is necessary when the government wants to impose a tariff on an imported commodity to protect a domestic industry.

Nash equilibria of this game, Two competing firms are each planning to intr...

Two competing firms are each planning to introduce a new product. Firm 1 will decide whether to produce product A, product B or product C, while firm 2 can choose between products

Classical view on unemployment, CLASSICAL VIEW ON UNEMPLOYMENT The cla...

CLASSICAL VIEW ON UNEMPLOYMENT The classical economists as we observed in Unit 1 of this course, were of the view that full employment prevailed  in  the  economy  all the tim

Types of elasticity, what are the examples of the types of elasticity (pri...

what are the examples of the types of elasticity (price,income & cross elaticity

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd