![]() The transformed equation can be estimated using linear regression analysis. The second is the result of a logarithmic transformation applied to the first. Equation 7–9 defines long-run marginal cost (LMC) as the change in long-run total cost divided by the corresponding change in output.Įquations 7–10 and 7–11 define the learning curve as a power function and represent it in two forms. Equation 7 5 defines marginal cost (MC) as the change in short-run total cost or, equivalently, the change in total variable cost divided by the corresponding change in output.Įquations 7–6 and 7–7 relate average variable cost and marginal cost to the average product of labor (APL), the marginal product of labor (MPL), and the wage rate (w) in the case where labor is the only variable input and the wage rate is constant.Įquation 7–8 defines long-run average cost (LAC) as long-run total cost (LTC) divided by output (Q). Equations 7–2, 7–3, and 7–4 define average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC) as the ratio of the relevant total cost divided by output (Q). Equation 7 1 defines short-run total cost (TC) as total fixed cost (TFC) plus total variable cost (TVC). The Appendix to this Study Guide includes information about these programs and sample problems that demonstrate their use.Įquations 7–1 through 7–5 define the family of short-run cost functions. The Breakeven Analysis Calculator, the Function Analysis Calculator, the Regression Analysis Calculator, the Descriptive Statistics Calculator, and the Data Manager programs in Analytical Business Calculator are designed to perform these types of calculations. The problems in this chapter require calculations that involve graphing of functions and statistical analysis. Finally, you should understand how to use regression, engineering, and survival methods to estimate cost functions and you should be aware of the difficulties that are commonly encountered in the estimation of cost functions. You should understand the relationships between total and unit cost curves in the short-run and the long-run, the relationship between cost and profit, the application of cost-profit-volume (breakeven) analysis, and the significance of operating leverage. More fundamentally, you should be conversant with the economic concept of cost and be able to distinguish it from accounting approaches to cost measurement. ![]() When you have completed the material in this chapter you should understand the relationship between the production theory and cost theory and between empirically estimated production functions and their cost counterparts. ![]() This chapter reviews the microeconomic theory of cost and explains how cost relationships can be estimated and used in decision making.
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