Suppose a firm's short-run production function is given by Q = F(L)= 4L.If the wage rate is $12 and the firm has sunk costs of $300,then the firm's cost function is:
A) C(Q) = $12L.
B) C(L) = $300 + $3L.
C) C(Q) = $300 + $3Q.
D) C(Q) = $300 + $12Q.

Question

Quizplus · Accepted Answer

The cost function includes both variable and fixed costs. The variable cost is the wage rate times labor, and fixed costs are the sunk costs. Since Q = 4L, L = Q/4. The variable cost is $12L = $12(Q/4) = $3Q. Adding the fixed cost of $300 gives C(Q) = $300 + $3Q.

Suppose a Firm's Short-Run Production Function Is Given by Q