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Microeconomic Cost function

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11/21/2015 10:06:25 PM
Posted: 2 years ago
Hello. I'm here to ask a specific question.

I'm trying to figure out the cost function for my start up to get an idea of how we should be pricing things. I'm having a specific issue (my micro is rusty).

When looking at fixed costs, it's often assumed the fixed costs are monthly recurring costs like rent, utilities, etc. etc. Many of the fixed costs we face are one-time development costs and are non recurring. I'm trying to figure out how to represent this in the same equation because normally it's assumed your fixed costs are recurring each month.

Let's say our monthly fixed costs are $4,500. We have one time costs of $25,000 right off the bat. Normally when I see cost functions the unit of time is not included, the fixed recurring costs are written as

TC= fixed costs+ per unit costs*Q

I'm tempted to simply add a time dimension to the equation, but am not sure if the resulting equation will be of any business use.

TC= One time sunk cost+( monthly fixed*m) + per unit costs*Q
TC= $25,000 +($4,500*m) + per unit costs*Q

Can anyone think of obvious flaws to this approach?
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11/25/2015 10:19:09 AM
Posted: 2 years ago
As far as I know it's very common do use depreciation to allocate the costs of investments (in this case the one time sunk costs of $25,000) to the months.

I'm not sure how long you are able to use the investment of $25,000, but I'll assume it's 2 years.

So every month you'll have $25,000 / 24 (the amount of months in two years) = $1,041.67 in depreciation if you can really use your investment for 2 years.