Estimating and Predicting Cost
* Estimates of future costs can be obtained from a cost function, which relates cost of production to level of output and other variables which the firm can control.
* Assume that we wanted to derive total cost curve for automobile production.
Total Cost Curve for Automobile Industry Estimating and Predicting Cost
* A linear cost function (does not show U-shaped characteristics) might be: The linear cost function is applicable if marginal cost is constant.
- Marginal cost can be represented by β.
* If we wish to allow for a U-shaped average cost curve and a marginal cost which is not constant, we might use quadratic cost function: If the marginal cost curve is not linear in nature, we may use a cubic cost function: