THE VARIOUS MEASURES OF COST

Our analysis of Hungry Helen’s Cookie Factory demonstrated how a firm’s total cost reflects its production function. From data on a firm’s total cost, we can derive several related measures of cost, which will turn out to be useful when we analyze production and pricing decisions in future chapters. To see how these related measures are derived, we consider the example in Table 2. This table presents cost data on Helen’s neighbor-Thirsty Thelma’s Lemonade Stand.

TABLE 2 The Various Measures of Cost: Thirsty Thelma’s Lemonade Stand

Figure 3 plots Thelma’s total-cost curve. The quantity of lemonade (from the first column) IS on the horizontal axis, and total cost (from the second column) is on the vertical axis. Thirsty Thelma’s total cost curve has a shape similar to Hungry Helen’s. In particular, it becomes steeper as the quantity produced rises, which (as we have discussed) reflects diminishing marginal product.

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