Cost function

Definition

A cost function represents the cost of producing a certain number of goods or services as a function of the quantity produced. It is typically expressed in algebraic form and used to model economic behavior.

5 Must Know Facts For Your Next Test

1. The cost function can often be written as $C(x) = c_0 + c_1x + c_2x^2 + ... + c_nx^n$, where $c_i$ are constants and $x$ is the quantity produced.
2. In linear cost functions, the total cost is represented by $C(x) = c_0 + c_1x$, where $c_0$ is the fixed cost and $c_1$ is the variable cost per unit.
3. Understanding how to derive and interpret the slope and intercept in a linear cost function is crucial for analyzing production costs.
4. Cost functions can be used to determine break-even points by setting the total revenue equal to the total cost.
5. Cost functions are integral in solving systems of equations involving production constraints and optimization problems.

Review Questions

• How do you represent a linear cost function algebraically?
• What do the constants in a quadratic cost function represent?
• Explain how you would find the break-even point using a cost function.

Related terms

Fixed Cost: Costs that do not change with the level of output produced, represented by the constant term in a linear cost function.

Variable Cost: Costs that vary directly with the level of output produced, represented by coefficients multiplying $x$ in a linear or nonlinear cost function.

Break-even Point: The production level at which total revenue equals total costs, resulting in neither profit nor loss.