Solution:

Cost Function:

• The cost function is derived from the production function. The time factor is very important in cost theory. The short-run costs are the costs over a period during which some factors of production are fixed.

• The long-run costs are the costs over a period long enough to permit changes in all factors of production. Both in the short-run and the long-run, the cost is a multivariate function, i.e., it is determined by many factors simultaneously, symbolically, the long-run cost function is given as:

  C = f(X,T,Pf)

  And the shot-run-run cost function is:

  C = f(X, T, Pf, K)

  Where C = Total Cost

  X = Output

  T = Technology

  Pf = prices of factors

  K = Fixed factor (s)

• Graphically, the cost function is generally shown on a two-dimensional diagram by taking C= f(x), ceteris paribus, If other factors (i.e.T, Pf) change, then the cost curve will shift.

Determinants of Costs:

Factors determining the cost are:

(a) Size of plant:

• There is an inverse relationship between the size of the plant and cost. As the size of the plant increases, the cost falls, and vice versa.

(b) Level of Output:

• There is a direct relationship between output level and cost. More the level of output, more is the cost ( i. e., total cost) and vice Versa.

(c) Price of Inputs:

• There is a direct relationship between the price of inputs and cost. As the price of inputs rise , cost ruses and vice versa.

(d) State of technology:

• More modern and upgraded technology implies lesser cost and vice versa.

(e) Management and administrative efficiency:

• Efficiency and cost are inversely related. More efficiency in management and administration better will be the product and less will be the cost. The cost will cause inefficiencies in management and administration.