1
$\begingroup$

Unit cost function is the minimum cost to produce one unit of output.

enter image description here

The solution to the above problem is:

enter image description here

where ai(w,r) is the amount of labour needed to produce 1 unit of good i at factor prices (w,r).

How do we arrive at this specific solution by finding the optimal values of K and L?

$\endgroup$
0

1 Answer 1

1
$\begingroup$

Here $a_{iL}(w,r)$ and $a_{iK}(w,r)$ is just notation for the solutions to the cost minimization problem. There is no need for any derivation. It could only be possible to find a specific solution (i.e. solve the cost minimization problem to find the functions $a_{iL}$ and $a_{iK}$) if you were given a specific production function $f_i$.

[I suppose here $f_i$ must be constant returns to scale to make the idea of a unit cost function useful.]

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.