____ is a method of approximating cost functions?

C(w1, w2, y) is a method of approximating cost functions. If you want to have a look at some formulas so that you can approximate cost function, then have a look at this site: http://en.wikipedia.org/wiki/Marginal_cost#Cost_functions_and_relationship_to_average_cost

• Definition of cost function

Cost function is the cost of making an output, therefore the end product, after the input costs have been taken into consideration.

• Why is it important

Any business or manufacturer needs to have a realistic and reliable way of determining costs otherwise it is impossible to be able to arrive at a retail price that is viable and reasonable. Naturally, this can play a huge part when it comes to profits and losses. If the price is set too high then the response will be no sales because consumers will turn to competitors; if the price is set too low there will almost certainly be no shortage of consumers but the business will make a loss.

• Cost control

Cost function is tied into cost control, which can also be referred to as cost containment or cost management. These are the methods that are used, both in accounting and in management, to improve a business by making it more cost effective.

This can be done in one of two ways: By reducing the input costs so that the profit margin is greater, or if that is not possible, restricting the rate at which those input costs grow.

These methods are used by businesses in order to evaluate and monitor their costs in order to become more efficient in particular areas, such as individual product lines, or departments.

• Disadvantages

It is important that costs are not cut so much that they have a detrimental effect on the end product. This can ultimately lead to loss of sales and the business facing closure with a resultant loss of jobs, which ultimately affects the economy.