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: