THE LINK BETWEEN PRODUCTION AND COSTS
We can see the derivation of cost from production data in the simple numerical example shown in Table 7-4. Suppose Farmer Smith rents 10 acres of land and can hire farm labor to produce wheat. Per period, land costs $5.5 per acre and labor costs $5
per worker. Using up-to-date farming methods, Smith can produce according to the production function shown in the first three columns of Table 7-4. In this example, land is a fixed cost (because Farmer Smith operates under a 10-year lease), while labor is a variable cost (because farm workers, unlike tenured faculty members, can easily be hired and fired).
Using the production data and the input-cost data. for each level of output-we-calculate the total cost of production shown in column (6) of Table 7-4. As an example, consider the total cost of production for 3 tons of wheat. Using the given production
function, Smith can produce this quantity with 16 acres of land and 15 farmhands. The total cost of producing 3 tons of ‘wheat is (10 acres X $5.5 per acre) + (15 workers X $5 per worker) = $139. Similar calculations will give all the other total cost figures
in column (6) of Table 7~. Note that these total costs are identical to the ones shown in Tables 7-1 through i-3. so the other
cost concepts shown in the tables (i.e., MC,Fe, .VC,
Farmer Smith rents 10 acres of wheat land and employs variable labor. According to the farming production function. careful use of labor and land allows the inputs and yields shown in columns (1) to (3) of the table. Al input prices of $5.5 per acre and $5 per worker. we obtain Smith’s cost of production shown in column (6). All other cost concepts’ (such ‘as those shown in Table 7-3) can be calculated from the total cost data. AC, APC, .and AVC) are also applicable to the production cost example of Farmer Smith.
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