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How do you derive a cost function for a production function?
How do you derive a cost function for a production function?
Expert Solution
Let say the production function is given by q = f(k,l)---(1) , where q is the maximum output that can be produced using labor(l) and capital(k).
Hence, the cost function is given by C(w,r,q) = wl + vk-----(2), where w is the wage rate, r is the per unit cost of capital, l and k are functions of w,v,and q.
Assuming that a production function is continuous and differentiable, we can set up Lagrangian for minimizing the cost for a given level of output, say q0q0.
The Lagrangian is given by:
L=wl+vk+λ(q0−f(l,k))L=wl+vk+λ(q0−f(l,k))
differentiating the above function wrt k, l and λλ, we get the first order conditions as follows:
∂L∂k=v−λfk(l.k)=0∂L∂k=v−λfk(l.k)=0
∂L∂l=w−λfl(l.k)=0∂L∂l=w−λfl(l.k)=0
∂L∂λ=q0−f(l.k)=0∂L∂λ=q0−f(l.k)=0
Using the three first order conditions, we get conditional input demand of k and l in terms of w,v and q.
Using (2) and the input demand derived via FOC's, we get the cost function.
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