Cost Function

UNIT 6 COST FUNCTION

Structure
6.0 Objectives
6.1 Introduction
6.2 Cost Minimisation
6.2.1 Graphical Approach for Cost Minimisation
6.2.2 Expansion Path
6.2.3 Analytical Approach for Cost Minimisation
6.3 Conditional Factor Demand Function
6.4 Cost Function
6.4.1 Properties of a Cost Function
6.4.2 Average and Marginal Cost Functions
6.4.3 Relationship between AC and MC Function
6.5 Short-run and Long-run Cost Functions
6.5.1 Short-run Cost Function
6.5.2 Long-run Cost Function
6.6 Let Us Sum Up
6.7 References
6.8 Answers or Hints to Check Your Progress Exercises

6.0 OBJECTIVES
After going through this unit, you should be able to:
• state the concept of cost minimisation;
• graphically and analytically approach the problem of cost minimisation;
• explain and derive conditional factor demand functions as a solution
of the constrained optimisation problem of cost minimisation;
• subsequently derive the cost function as a function of factor prices
and output;
• analyse average cost and marginal cost functions, along with the
relationship between them; and
• discuss the concept of short-run and the long-run cost functions.

6.1 INTRODUCTION
A production activity is undertaken for earning profits, and the producer
decides how much input to use to minimise its costs and maximise its
profits. Profits are given by the difference between the revenue earnings
from and the costs incurred during the production process. Costs, be it
131
Production and Cost implicit or explicit, are the expenses incurred by the producer for
undertaking the production of goods or services. Explicit costs are the out of
pocket expenses which the producer makes payment for, like paying for raw
materials, salaries and wages of staff employed, packaging and distribution
expenses, etc. On the other hand, by implicit it simply means the implied or
the opportunity cost of the self-owned inputs used by the producer in the
production process, like opportunity cost of entrepreneurial skills of the
entrepreneur, self-owned building used as office for business operations,
etc. Economic profits are calculated using both, the explicit as well as the
implicit costs. The optimal output of the firm is decided by maximisation of
profits or by minimisation of costs incurred. The present unit is an attempt
to analyse the approach of cost minimisation.
Unit begins with explaining the concept of cost minimisation. It proceeds
with the sub-sections discussing the graphical and the analytical approach
for cost minimisation. Subsequently, the concept of conditional input/factor
demand functions will be introduced and plugging these optimal values, cost
function will be derived. We will then derive the algebraic expression of
average cost and the marginal cost functions from the cost functions. The
unit also covers a mathematical proof of the relationship between the AC
and the MC curve, which was already covered in Introductory
Microeconomics course of Semester 1 (BECC-101). Towards the end, the
concepts of variable and fixed factors of production, and consequently the
short-run and the long-run cost functions have been discussed.

6.2 COST MINIMISATION

By cost minimisation it simply means to produce a specified output at the
minimum cost. This in turn results from employment of a mix of factors or
inputs so that the desired level of output is produced at the least cost.
Consider a production function given by Q = f (K, L), where Q is the output
produced by employing inputs K and L at given per unit factor prices r and w,
respectively. Then total cost of producing a specified output Q will be given
by:
C = Lw + Kr
Now cost minimisation would result in the following constrained
optimisation problem:
Min Lw + Kr
s.t. Q = f (L, K)
Here, the problems entails finding out the cheapest way to produce a given
level of output (Q) by a firm employing inputs K and L at the given inputs
prices and a technology relationship f (L, K). The optimal solution of the
above constrained minimisation problem will be given by (L*, K*) such that
for all (L, K) satisfying Q = f (L, K), we will have L*w + K*r ≤ Lw + Kr.

132
 Cost Function
6.2.1 Graphical Approach for Cost Minimisation
Recall the concept of Producer’s equilibrium we discussed in Unit 7 of your
Introductory Microeconomics course of Semester 1 (BECC-101). A producer
attains equilibrium by minimising the cost of producing output. This in turn
involves employing a particular factor combination at the given factor prices
and the input-output technological relationship. Fig. 6.1 represents such an
optimal factor combination.

C� Q
�0, � A′′
r
C�
�0, � A′ F
r
C� A
�0, �
r

K1 E
K (Capital)

G
Q′

O L1 B B′ B′′
L (Labour)

Fig. 6.1: Cost minimisation combination of factors

Lines AB, A′B′ and A′′B′′ represent Isocost lines. An isocost line is a locus of
various combinations of factor inputs (here K and L) that yield the same total
cost (C) for the firm. The equation of the isocost line is given by,
� �
C = Lw + Kr ⟹ K = − L
� �
�
This is a linear equation with slope , a constant measuring the cost of one
�
factor of production in terms of the other factor. For different values of C in
the above equation, we get different isocost lines. In Fig. 6.1, A′′B′′
� �
representing total cost C1 is given by, K = � − L. Similarly, outlays
� �
represented by A′B′ and AB are C2 and C3, respectively. Given the factor
prices, a higher outlay results in an outward parallel shift of the isocost line,
thus, to the north-east, higher isocost lines correspond to higher levels of
cost. In the above figure we have C1 > C2 > C3.
Curve QQ′ is the isoquant giving various combinations of factor inputs that
yield the same level of output (Q). Fig. 6.1 shows an isoquant representing a
given output level of output (let say Q*). Cost minimisation exercise involves
minimising the total cost of producing a given level of output (here Q*). For
instance, consider three possible factor combinations denoted by points E, F
and G giving different cost of producing output level Q*. Point E provides
factor combination producing output Q* at the cost of C3, while F and G
133
Production and Cost represents factor combinations producing output level Q* at the cost of C2
and C1, respectively. Among these possibilities, point E provides the least
cost (= C3) factor combination to the firm, as we know both C1 and C2 are
higher than C3 (C1 > C2 > C3). Graphically at point E, slope of the isoquant
given by the Marginal Rate of Technical Substitution (MRTSLK— the rate at
which two factors can be substituted with each other in the production of a
constant level of output) equals the slope of the isocost line. Point E, the
tangency point between isoquant and the isocost line gives us the optimal
combination of factors of production, i.e. OL1 amount of labour and OK1
amount of capital. Symbolically, at E we have,
� ��� � ��
MRTSLK = or = (as we know MRTSLK = �� � )
� ��� � �

6.2.2 Expansion Path

How does the cost-minimising factor combination changes as the output
production increases, keeping constant the factor prices?— an expansion
path answers such a question. Given factor prices, a firm can determine cost
minimising combination of factors for every level of output following the
�
rule MRTSLK = , that is the tangency between isoquants and isocost lines.
�
The expansion path is nothing but a locus of such optimal factor
combinations as the scale of production expands. In Fig. 6.2, expansion path
OE is determining minimum cost combinations of labor (L) and capital (K) at
each level of output. As output expands, (represented by higher isoquants
Q3 > Q2 > Q1) total cost of production rises as well, which is depicted in the
figure by parallel rightward shifted isocost lines. The cost minimising factor
combination occurs at point E1, E2, E3, the locus of which, is called the
expansion path.
Remember
The equation of the expansion path is determined by the cost minimisation
�
rule, MRTSLK = .
�
K (Capital)

E3
E2
Q3
E1
Q2
Q1

O L (Labour)
134 Fig. 6.2: Expansion Path
 Cost Function
6.2.3 Analytical Approach for Cost Minimisation
Analytically, optimal combination of factors employed can be ascertained by
finding the solution of the following constrained optimisation problem:
Min Lw + Kr
s.t. Q* = f (L, K)
where Q* is the stipulated level of output produced.
We proceed solving the above problem by finding the Lagrangian function:
ℒ = Lw + Kr + λ [Q* – f (L, K)]
The first-order optimisation conditions are:
�ℒ ��
��
= 0 ⟹ w − λ ���� = 0 ⟹ w = λ MP� 1)
�ℒ ��
��
= 0 ⟹ r − λ ���� = 0 ⟹ r = λ MP� 2)
�ℒ
��
= 0 ⟹ Q∗ − f(L, K) = 0 ⟹ Q∗ = f(L, K) 3)

From (1) and (2) we get

��� �
= 4)
��� �

Same as is given by the tangency of the isocost and the isoquant. Thus, cost
minimisation requires equality between the MRTSLK and factor price ratio.
Equation (4) can also be written as
��� ���
=
� �
The above equation implies that a producer minimises cost of production
when marginal output generated by the last monetary unit spent on each
factor is equal.
Now, Equations (3) and (4) can be solved to arrive at the solution of the
��� �
cost-minimisation problem. That is, we solve = and Q∗ = f(L, K) to
��� �
get optimal inputs (L*, K*). L* and K* represent the amount of labour and
capital factors needed to be employed at the given prices of w and r
respectively, so as to produce output level Q at the minimum cost. This
minimum cost will then be given by
C = L*w + K*r
Example 1
� �
Consider the production function Q = L� K � where output Q is produced
using factors L and K. Given per unit factor prices of L and K as Rs 10 and
Rs. 5, respectively, find the expression for minimum cost of producing
output Q.

135
Production and Cost Solution
We need to find solution (L*, K*) of the following constrained optimisation
problem:
Min 10L + 5K
� �
s.t. Q = L� K �
From the first order condition of the cost minimisation, we get the following
equation:
−1 2
�
��� � L 3 K3 ��
�
= ⇒ 2 −1 =
��� � � �
L3 K 3
�
�
⇒ � = 2 ⇒ K = 2L , substituting this relation in our production
function, we get the two conditional demand functions for input K and L as
follows:
� �
L* = Q�
√�
3
K* = √2 Q4
Therefore, the cost function is given by
3 �
1
C = 10 �√2 Q4 � + 5�√2 Q� �
�
= 10 √2 Q�

Check Your Progress 1

1) Determine the equation for the expansion path of a production function
given by Q = LK2, where Q stands for output produced using factors K
and L priced at Rs. 10 and Rs. 15, respectively.
………………………………………………………………………………………………………………
………………………………………………………………………………………………………………
………………………………………………………………………………………………………………
2) Production of a good is represented by the following technological
relationship

Q = 10√KL
Where K and L are the factor inputs and Q is the output. Given per unit
price of factor K as Rs. 3 and that of factor L as Rs. 12, what will be the
minimum cost of producing 1000 units of this good?
………………………………………………………………………………………………………………
………………………………………………………………………………………………………………
………………………………………………………………………………………………………………
136
 Cost Function
6.3 CONDITIONAL FACTOR DEMAND FUNCTION
As we saw in Sub-section 6.2.3, the solution of the cost minimisation
problem
Min Lw + Kr
s.t. Q* = f (L, K)
gives us L* and K* for the given values of w, r and Q*. That is, we arrive at
the optimum level of factors employed in the production process for the
given output level Q* and factor prices w and r. Any change in any one or all
of these parameters will give us different values of L* and K*. Thus, solution
to the cost minimisation problem involves finding L* and K* as a function of
w, r and Q*. Symbolically, we get
L* (w, r, Q*)
K* (w, r, Q*)
which are known as the conditional factor demand functions as a solution of
the constrained cost minimisation problem for the given production
function, output level Q* and factor prices as w and r.
You might wonder why the word “conditional” before “factor demand
function”. The reason for this is— a factor demand function specifies profit
maximising levels of factor employment at given unit factor price, when
output level is free to be chosen, whereas a conditional factor demand
function gives the cost minimising level of input employment at given unit
factor prices, to produce a given level of output. That is, factor employment
is conditional upon the output level to be produced. So along the
conditional input demand function of L or K the output remains constant at
Q*. Therefore any increase (or decrease) in Q* will be accompanied by a
outward (or inward) shift of conditional demand function of L or K.
Conditional input demand function for labour L (or capital K) is always
negatively sloped with respect to its own price w (or r in case of capital K).
Conditional input demand function captures only the substitution effect
(similar concept like compensated or Hicksian demand functions which you
have done in Consumer theory) and therefore is less elastic as compared to
ordinary input demand function (a function of prices of inputs and output).

6.4 COST FUNCTION

A cost function is derived using production function and factor prices,
assuming the rational of minimisation of the cost of production by the
producer. On inserting conditional demand functions, i.e. L* (w, r, Q*) and
K* (w, r, Q*) in our expression for total cost, C = Lw + Kr, we arrive at the
cost function C (w, r, Q*).
C (w, r, Q*) = L*(w, r, Q*) w + K* (w, r, Q*) r
A function of factor prices and output, the cost function C (w, r, Q*) gives
the minimum cost of producing a specific level of output (Q*) for some given 137
Production and Cost factor prices. You may note that optimisation has already been taken care of
during construction of conditional factor demand functions, thus cost
function gives the optimised solution to the producer regarding how much
to employ of a factor in the production process.
Till now we have been considering a production function with two factor
inputs (L and K), but in reality there can be more than two inputs in the
production process. Let there be “n” factor inputs represented by vector X =
(x1, x2, x3,…. xn) used in the production of output Q, such that our production
function becomes, Q = f (x1, x2, x3,…. xn). Corresponding to factor vector X =
(x1, x2, x3,…. xn), let factor price vector be W = (w1, w2, w3,…., wn). Then, the
conditional factor demand function for factor i (where i = 1, 2,.…, n) will be
represented by xi = (W, Q), total cost function by C (W, Q).

6.4.1 Properties of a Cost Function

Let us now discuss some properties of the cost function:
1) Cost function is non-decreasing in factor prices, that is, considering two
factor price vectors W′ and W, so that W′ ≥ W, then C (W′, Q) ≥ C (W, Q).
Also, the function is strictly increasing in at least one factor price.
2) Cost function is non-decreasing in output. That is, Q′ ≥ Q, then C (W, Q′)
≥ C (W, Q) for W > 0. That is, increasing production increases the cost of
production.
3) Cost function is homogeneous of degree 1 in factor prices. That is, a
simultaneous change in all factor prices by a certain proportion (let say
by λ, where λ > 0), changes the cost of production by the same
proportion (λ). Symbolically,
C (λ W, Q) = λ C (W, Q) for W, Q, λ > 0
Similarly it can be shown that the conditional factor demand functions (L
and K) are homogeneous of degree zero.
4) Cost function is concave in factor prices. Symbolically,
C (t W + (1 ‒ t) W, Q) ≥ t C (W, Q) + (1 ‒ t) C (W, Q) for t ∈[0,1]
5) Shephard’s Lemma: If a cost function C (W, Q) is differentiable at (W, Q)
and wi > 0 for i = 1,2,..,n, then a conditional factor demand function for
factor i, that is, xi (W, Q) is given by
��(�,�)
xi (W, Q) =
���

This lemma allows us to obtain conditional factor demand functions as

partial derivatives of the cost function.

Example 2
� �
For the production function Q = L� K � , where Q is the output, K and L the
production factors with per unit prices as r and w, respectively, determine
the cost function. Check the homogeneity condition and Shephard’s Lemma.
138
Solution Cost Function

Constrained optimisation problem is given by:

Min Lw + Kr
� �
s.t. Q* = L� K �
We solve the above problem by Lagrangian method to arrive at the
following condition pertaining to cost minimisation
−2 1
�
��� � L 3 K3 �
�
= ⇒ 1 −2 =
��� � � �
L3 K 3
�
� � �
⇒ = ⇒ K = L , substituting this relation in our production
� � �
function, we get our conditional factor demand functions:
1
� r 2
L* (w, r, Q*) = Q � � �
w
1
� w 2
K* (w, r, Q*) = Q � � �
r
Therefore, cost function is given by
C (w, r, Q) = L*(w, r, Q*) w + K* (w, r, Q*) r

1 1
� r 2 � w 2
∗�
= w�Q � � � + r�Q∗ � � � �
w r

= 2�Q∗ � wr

In order to check the homogeneity condition, let input prices (w and r)

increase by proportion λ. Therefore the cost function becomes:

C (λw, λr, Q*) = 2�Q∗ � (λw)(λr) = 2λ�Q∗ � wr = λ C (w, r, Q*)

Hence the cost function is homogeneous of degree one. You may also check
the homogeneity condition for the conditional factor demand functions of L
and K.
In order to check for Shephard’s Lemma we differentiate the cost function
with respect to the input price w (and r):

�
��(�,�,�∗ ) ����∗ � �� � �
� �
∗� ∗�
��
= ��
=2× ×Q r=Q �� � ⟹ Conditional input
���∗ � ��
demand function for Labour L.

139
Production and Cost �
��(�,�,�∗ ) ����∗ � �� � �
� �
∗�
��
= ��
= 2× ×Q w= Q∗ � � � � ⟹ Conditional
���∗ � ��
input demand function for capital K.

6.4.2 Average and Marginal Cost Functions

Average Cost Function
Average cost is defined as the cost per unit of output produced. Average
cost function, a function of input vector W and output Q, is derived from the
total cost function as follows:
� (�,�)
AC (W, Q) =
�

The function will determine the minimum per unit cost of producing a
specific level of output, given the factor prices.
Marginal Cost Function
Marginal cost is the addition to total cost as an additional unit of output is
produced. A function of input vector W and output Q, marginal cost function
is derived from total cost function as a partial derivative of it with respect to
the output:
�� (�,�)
MC (W, Q) =
��

It simply determines the minimum addition to the total cost from producing
an additional unit of output, given the factor prices.
Example 3
Given a total cost function, C = 100Q + wrQ2, find the average and marginal
cost functions.
Solution
� (�,�)
Average cost function (AC) =
�

���� �����
= = 100 + wrQ
�
�� (�,�)
Marginal cost function (MC) =
��

������ ����� �
= = 100 + 2wrQ
��

6.4.3 Relationship between AC and MC Function

We present below the relationship between the AC and the MC function.
� (�,�)
We know, AC =
�
140
Rate of change of AC with respect to Q will be given by, Cost Function

� C (W,Q)
� �
�� Q
�� ’(�,�)��(�,�)
⟹
��
C’(W,Q) C(W,Q) � �(�,�)
⟹ − ⟹ � �C’(W, Q) − �
Q Q2 �

�
⟹ � �MC − AC�

From the above result it follows that, for Q > 0:

i) Slope of AC curve or rate of change of AC will be positive, that is
�
(AC) > 0, as long as MC > AC, or in other words, as long as MC curve
��
lies above AC curve.
�
ii) Slope of AC curve or rate of change of AC will be zero, that is �� (AC) =
0, when MC = AC, or in other words when MC curve intersects AC curve.
This happens at the minimum point of the AC curve.
iii) Slope of AC curve or rate of change of AC will be negative, that is
�
(AC) < 0, when MC < AC, or in other words when MC curve lies below
��
AC curve.
Fig. 6.3 represents such a relationship.
AC/MC

MC
AC

O Output

Fig. 6.3: Relationship between AC and MC curve

6.5 SHORT-RUN AND LONG-RUN COST FUNCTIONS

The distinction between the short-run and the long-run is done in terms of
the fixed and variable factors of production. Fixed factors of productions are
inputs in the production process that do not change with the level of output,
generally comprising large capital assets, office building, machinery, etc. On
the other hand, variable factors are inputs that change with the level of
141
Production and Cost output. In the short-run firms may face some constraints in expanding or
contracting their inputs so there exist some fixed factors at some
predetermined levels along with some variable factors, whereas in the long-
run all factors become variable. Let us now try to incorporate the distinction
of short-run and long-run with the concept of cost function.
Let XV represent a vector of variable inputs used in the production process,
and XF be the vector of fixed inputs. Similarly, vector WV and WF be the price
vectors of variable and fixed factors, respectively.

6.5.1 Short-run Cost Function

In the short-run, we just discussed, exist some fixed factors (XF) which are
given, and some variable factors (XV) which vary with the output level Q.
Earlier, in Section 6.4, we derived cost function as a function of given
parameters W and Q, now for the short-run cost function, XF will be
considered as another factor which is given in the short-run. Considering
presence of both, the variable and the fixed factors in the production
process, the short-run cost function will be given by:
CS (W, Q, XF) =WV XV (W, Q, XF) + WFXF
Where, XV (W, Q, XF) is the conditional variable factor demand function,
which in general depends upon the value of the given fixed factor XF.
On the basis of the short-run cost function, we can further define the
following:
�� (�,�,�� )
Short-run average cost (SAC) function =
�
��� (�,�,�� )
Short-run marginal cost (SMC) function =
��

Short-run variable cost (SVC) function = WV XV (W, Q, XF)

�� �� (�,�,�� )
Short-run average variable cost (SAVC) function =
�

Short-run fixed cost (SFC) function = WFXF

�� ��
Short-run average fixed cost (SAFC) function =
�

Remember:
If Q = 0, SVC = 0 as XV = 0, but SFC = WFXF i.e. when output production
reduces to nil, short-run variable cost also reduces to nil as employment of
variable inputs reduces to zero, but short-run fixed costs are still needed to
be incurred regardless of the output level.

6.5.2 Long-run Cost Function

In the long-run, all factors become variable (XV) that is they vary with output
Q. Since there are no fixed factors (XF), and all factors are variable (XV), we
can write vector XV as vector X (our factor vector) with corresponding factor
142 price vector given by W. Then, we get the following long-run cost function:
 CL (W, Q) =W X (W, Q) Cost Function

which is the cost function we discussed in Section 6.4. From the above
function, we can derive the following:
�� (�,�)
Long-run average cost (LAC) function =
�
��� (�,�)
Long-run marginal cost (LMC) function =
��

Check Your Progress 2

1) For the following total cost functions, find the AC, MC, AVC and AFC
functions.
a) C = 5Q3
b) C = 10 + 7Q2
c) C = Q3 – 4Q2 + 10Q + 10
………………………………………………………………………………………………………………
………………………………………………………………………………………………………………
………………………………………………………………………………………………………………
2) Given the technological relationship between output Q and inputs L and
K priced at the per unit rate of w and r, respectively
�
Q = (L� + K � )�
a) Find the conditional factor demand functions L*(w, r, Q) and
K*(w, r, Q)
b) Derive the expression for the Cost function C (w, r, Q).
��(�,�,�)
c) Check for Shephard’s Lemma, that is check whether =
��
��(�,�,�)
L*(w, r, Q) and = K*(w, r, Q)
��
………………………………………………………………………………………………………………
………………………………………………………………………………………………………………
………………………………………………………………………………………………………………
3) Use Shephard’s lemma to derive factor demand functions from the
following cost functions:
a) C = Q2 (7w3 + 5r3)
b) C = 2 Q2 √wr
where K and L are the two factors of production with per unit prices r
and w, respectively.
………………………………………………………………………………………………………………
……………………………………………………………………………………………………………… 143
Production and Cost
6.6 LET US SUM UP
The objective of profit maximisation explains the rationale behind cost
minimisation by a producer of a good or a service. Costs incurred to carry
out production include both, the explicit as well as the implicit costs. The
present unit dealt with minimisation of such costs. For this, two approaches
were explained— the graphical and the analytical. Graphical approach
requires tangency between the isoquant curve and the isocost line.
Analytical approach on the other hand involved solving the constrained
optimisation problem of cost minimisation. We adopted the Lagrangian
method for solving our optimisation problem, given the technological
relationship between the factors and the output (i.e. the production
function) and the factor prices.
On the basis of the optimisation exercise, the conditional factor demand
functions— giving the optimum level of factors employed in the production
process for the given output level Q and factor prices w and r, were derived.
These functions were then employed to derive the cost function— a
function of factor prices and output. By linking the production function with
the factor prices, a cost function gives the minimum cost of producing a
specific level of output, given the factor prices. Certain properties of a cost
function were also touched upon. An important one being the Shephard’s
lemma, as per which a differentiable cost function can be used to derive
conditional factor demand functions.
Subsequently, average cost and marginal cost functions were derived from
the cost function. Average cost is the per unit cost of production, while
marginal cost is the addition to cost from producing an additional unit.
Further, the relationship between the AC and MC curve, which you have
already studied in your Introductory Microeconomics course of Semester 1
(BECC-101), was mathematically established. Towards the end, the criterion
distinguishing the short-run cost function from the long-run cost function
was set in place by bringing in the picture the fixed and variable factors of
production. Short-run cost function is composed of the cost incurred on
both, the variable and the fixed factors. Long-run cost function, on the other
hand is composed of the cost incurred on only the variable factors, as in the
long-run all factors become variable. You must be clear with this by now—
short-run and long-run are differentiated on the basis of the presence and
absence of fixed factors of production, respectively.

6.7 REFERENCES
1) Hal R. Varian, (2010). Intermediate Microeconomics, a Modern
Approach, W.W. Norton and company / Affiliated East- West Press
(India), 8th Edition.
2) Shephard, Ronald W, (1981). Cost and Production Functions, Springer-
Verlag Berlin Heidelberg.
3) Nicholson, W., & Snyder, C. (2008). Microeconomic theory: Basic
principles and extensions. Mason, Ohio: Thomson/South-Western.
144
 Cost Function
6.9 ANSWERS OR HINTS TO CHECK YOUR PROGRESS
EXERCISES
Check Your Progress 1
1) Equation for expansion path is given by, K = 3L
��� �
Hint: Use cost minimisation condition ���
= �
, where MPL = K2, MPK =
2LK, w = 15 and r = 10.
2) Minimum cost = Rs. 1200
� �
Hint: Production function Q = 10√KL can be written as 10K � L�
� ��
��� �
Use cost minimisation condition ���
= �
, where MPL = 5K � L � , MPK
�� �
=5K L , w = 12 and r = 3 to arrive at the relation K = 4L. Then use this
� �

relation in production function Q = 10√KL , where Q = 1000 to get L =

50 and K = 200. Minimum cost thus equals 12(50) + 3(200) = 1200.
Check Your Progress 2
1) a) AC = 5Q2, MC = 15Q2, AVC = 5Q2, AFC = 0
�� ��
b) AC = �
+ 7Q, MC = 14Q, AVC = 7Q, AFC = �
��
c) AC = Q2 – 4Q + 10 + �
, MC = 3Q2 – 8Q + 10, AVC = Q2 – 4Q + 10,
��
AFC = �
�
�����
2) a) L*(w, r, Q) = �
� � �
����� ����� �

�
�����
K*(w, r, Q) = �
� � �
����� � ���� �

Hint: Use the cost-minimisation condition,

1
� ρ ρ ρ−1 ρ−1
��� � (L +K ) ρL �
�
= ⇒ 1 =
��� � � ρ ρ ρ−1 ρ−1 �
(L +K ) ρK
�

� ��� �
⇒ � � =
� �
1
w ρ−1
⇒ L = K�r� 1)

From our production function and Equation (1), we get

145
Production and Cost � � � �
� � ��� � ���
Q = (L + K � )� ⇒ Q = �
�K � � � � �
+K ⇒Q =K � �
�� � � + 1�

� � �
��� � ���� � ����
� � �
⇒Q =K � � � ⇒ K* = �
� � �
���� ��� ���
�� �� �

Substituting value of K*in Equation (1), we get

�
� ����
L* = �
� � �
�� ��� ����� �

���
� �
�
b) C (w, r, Q) = Q �w ��� + r ��� �

Hint: Insert values of L* and K* in the cost function given by,

C (w, r, Q) = L*(w, r, Q) w + K* (w, r, Q) r
3) a) L*(w, r, Q) = 21 Q2w2 and K*(w, r, Q) = 15 Q2r2
��(�,�,�) ��(�,�,�)
Hint: ��
= L*(w, r, Q) = 21 Q2w2 and ��
= K*(w, r, Q) =
15 Q2r2
� �
b) L*(w, r, Q) = Q� �� and K*(w, r, Q) =Q� � �

146