The typical undergraduate intermediate microeconomics textbook uses geometric arguments accompanied by two-dimensional diagrams to present the principles of cost minimization and profit maximization (see Pindyck and Rubinfeld 1995). These tools are sufficient to explain the behavior of a firm with one choice variable-for example, the level of production of a single product from a single factory. More realistic models, where firms have multiple products, factories, and technologies, are usually not presented because they require the use of more sophisticated mathematical techniques, such as Lagrange multipliers. In this article, I develop a simple diagrammatic exposition of optimization principles for problems with two choice variables. In the basic model, the choice variables correspond to production levels in two different factories.' In addition to illustrating the familiar equal marginal value principle, the basic model makes more advanced topics, such as corner conditions and the role of convexity in optimization, accessible to a wide variety of students. An extension of the model illustrates the fundamental relationship between profit maximization and cost minimization. Other extensions are used to analyze important environmental issues, such as the cost effectiveness of policy proposals to reduce auto emissions, the economics of garbage disposal, and the economics of pollution abatement. THE MODEL Consider a firm that produces a single product in two different factories. Let q, be the quantity produced in the first factory and q2 be the quantity produced in the second. The factories have cost functions CI(qi) and C2(q2) and associated marginal cost functions MCI(ql) and MC2(q2), respectively.2 The firm wants to produce q, units of the product so that the total cost of production is minimized. The solution may be found graphically by placing the marginal costs curves back-to-back so that they share the same y axis, but quantity produced increases in opposite directions along the x axis. The total cost associated with any particular division Y, q q of production between the two factories is found by placing a ruler of length q, along the x axis so that the right edge is directly under qf and then calculating the area bounded by the marginal cost curves and the ruler.
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