Profit Maximization Notes

# Profit Maximization Notes - 1 310-1 Week of Notes Returns...

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1 310-1 Week of 10-27-2014 Notes Returns to Scale ( a LR concept): All inputs increased by some factor, how does output respond? IRTS (Increasing Returns to Scale): Output increases more proportionately than the inputs do. E.G., double inputs, output more than doubles. I ask myself, why, oh why? CRTS (Constant Returns to Scale): Yup, just what you think—when inputs are increased proportionately, output increases by the same proportion. E.G., triple inputs, output triples. DRTS (Decreasing Returns to Scale): Yeah, yeah, yeah, when inputs are increased proportionately, output increases by less. E.G., quadruple inputs, output less than quadruples. Again, I aks myself of why, oh why? 3) Costs in SR (K fixed)

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2 Translate Characteristics of Production (Pdn) into Characteristics of Costs : TC = TFC + TVC (or sometimes I’ll just write C = FC + VC) FC—costs that do not vary with output. VC: incurred only when a firm is producing output and vary directly with output. Assume only variable input is labor—can hire all labor want at w = \$50 per shift. So, TVC = w*L Q \$ L Q More definitions: Know TC = TVC + TFC so ATC (or AC) = AVC + AFC since AC = TC/Q = TVC/Q + TFC/Q.
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