varianees in classical setting In Chapter 2 we examined a single produet finn that used three faetors of produetion. The eost of producing output q was the minimum total expenditure on the three faetors that would allow for produetion of q units.

A A A C(q) • minimum P1Z1 + P2~ + P3~

Z,0Z2,z3 subjeet to: q = f(zl,~,z3)

where Pj is the price of faetor i and zj is its quantity. Suppose the finn's accounting library uses three eost aeeounts, one for eaeh faetor of produetion. Assume it produced q units, and incurred a total eost for faetor i of i\7,. Total eost should have been C(V.

Faetor the difference between aetual and total eost into price and quantity effeets for eaeh of the three faetors. Is it reasonabIe to assume the noted variances are interreIated?

AppendixLO1