Question

What is the relation between production functions and cost functions? Discuss the effect of conditions in input factor markets.

Answer 1

A production function demonstrates the amount of output we get from inputs. The production for certain items requires one, explicit blend of contributions to accomplish input. For these capacities, there is just a single formula for creating the objective measure of output (Leontief production function). Other production functions (Cobb-Douglas (CD), Constant Elasticity of Substitution(CES), and so forth production function) enables various mixes of contributions to accomplish production of output. These capacities take into account substitutions among the information sources. We get the cost function from the production work, the costs of the sources of info, and the target output. For a Leontief production function, the cost function is just the entirety of the expense cost of inputs (quantity of each input times the cost of that input) required to item target output.

For production function that permit substitution, various mixes of contributions, to acquire the target output, the cost function is essentially the total of the expense of contributions for the mix of data sources that is most affordable. For every one of the mixes of data sources that we may use to create, for instance, 100 units of output, the cost function demonstrates to us the cost of the mix that delivers the 100 units generally modestly. At the point when the production function are smooth and the stockpile bends of supply curve of the input also smooth, the cost function is smooth: the most minimal expense is a smooth function of the input costs and the target output. For this situation, we determine the cost function officially by limiting the all-out total cost of input (entirety of the amount of each info times its price) subject to the requirement that the output of the production function rises to the target output.