Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

172 COSTS OF PRODUCTION [CHAP. 7
amount of capital used per time period is kept fixed at five units, explain why STC can never be less
than LTC.
Fig. 7-23
(a) Table 7.14
(1) (2) (3) (4) (5) (6) (7) (8)
L P L ($) TC L ($) K P K ($) TC K ($) LTC (3 þ 6) ($) Q
3 100 300 3 100 300 600 100
5 100 500 5 100 500 1000 200
6 100 600 6 100 600 1200 300
8 100 800 8 100 800 1600 400
11 100 1100 11 100 1000 2200 500
15 100 1500 15 100 1500 3000 600
(b)
When the firm employs five units of labor and five units of capital per time period, it produces 200 units of
output at a cost of $1000. This is given by point B in the isoquant-isocost diagram (Fig. 7-23). At point B,
MP L /P L ¼ MP K /P K . Suppose that now the firm wants to increase its output to 300 units per time period.
With the amount of capital fixed at five units (we are thus dealing with the short run), the firm could
produce 300 units of output by using eight units of labor (thus moving to point D). At point D, the firm
incurs a TC of $1300 and MP L /P L , MP K /P K . In the long run (i.e., when all factors are variable), the
firm would produce 300 units of output by using six units of labor and six units of capital (point C) and
incur a TC of only $1200. At point C, MP L /P L is once again equal to MP K /P K .