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- StudyBlue
- Wisconsin
- University of Wisconsin - Milwaukee
- Business Administration
- Business Administration 320
- Trick
- Chapter 9: Applications Of Cost Theory

Short Run Cost Function

- Can be represented by a cubic relationship
- Both capital (K) and labor (L) are fixed

Long Run Cost Function

- A quadratic curve of a cross section of ACs for various firms is used
- Capital (K) is not fixed, labor (L) is fixed

Log Linear LR Cost Curves

Another functional form to the LR cost curve.

[LnTC = a + b(LnQ) + c(LnW)

- Coefficients are the elasticities
- "b" is the output elasticity of TC
- "b" can never be negative

Significance of "b"

- If
**b = 1**, then constant returns to scale LR cost function - If
**b < 1**, then increasing returns to scale LR cost function - If
**b > 1**, then decreasing returns to scale LR cost function

Testing Returns to Scale: T-test

H_{0}: b = 1

H_{a}: b not equal to 1

t= coefficient/standard error

If critical t < estimated t: reject the null hypothesis

If critical t > estimated t: do not reject the null hypothesis

4 Functional Shapes

Constant

- horizontal line

- 45 degree angle

- U-shaped
- AC is often quadratic
- MC is often quadratic

- S-shaped
- TC is often cubic

To Calculate Average Cost

To Calculate Marginal Cost

Economies of Scope

Engineering Cost Approach

Survivor Technique

Break-even Analysis

Solving for Break-even Quantity

Contribution Margin

Solving for Break-even Sales Volume

Variable Cost Ratio

Solving for Target Profit Quantity

Contribution Analysis

Limitations of Break-even and Contribution Analysis

Break-even Analysis and Risk Assessment

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