Question

20) Which of the following is not a determinant of a firm's cost functions?

A) The productivity of the firm's labor.
B) The price of capital.
C) The price of the firm's output.

D) The price of labor.

Answer 1

Answer 20

The correct answer is (C) The price of the firm's output.

In order to determine Cost function We have to Minimize : Cost = wL + rK

Subject to : f(L,K) = Q

where w = price of capital , r = price of labor, L = amount of Labor, K = amount of Capital, f(L,K) = Production function and Q = amount of output produced.

Thus Firm's cost function depends on both price of Labor and price of Capital. As price of labor or price of capital increases then in order to produce Q amount of output he has to spend more amount and hence cost incurs will increase and hence Cost function depends on price of capital or price of labor.

If the productivity of firm labor is higher then in order to produce Q amount of output, firm has to hire lesser amount of labor as If the productivity of firm labor is higher means that output per unit of labor is higher. Hence, Productivity of labor is also a determinant of cost function.

As discussed above that Cost function shows the cost a firm incurs in order to produce Q unit of output i.e. C = f(Q). Price of output has no role to play in the determining cost function because if price of a firm's output increases then this will effect firm revenue while cost of producing Q units of output will remain same. This change in price will effect Firm's decision of producing amount of output. But cost function shows the cost firm incurs in order to produce Q units of Output and this Q can be any amount of output. Hence Price of output does not effect cost function.

Hence, the correct answer is (C) The price of the firm's output.