Econ 101 Study Guide

# Econ 101 Study Guide - After 2nd Midterm Notes Duality...

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After 2 nd Midterm Notes Duality- There are 2 ways to think about the firm’s problem: 1. Picking the optimal quantity a. Firm determines technology- determines the production function: F(K,L) b. Firm minimizes cost i. Minimize (w · L+r · K) subject to Q=F(K,L) ii. Minimizing cost gives the cost c. Set P=MC 2. The competitive firm with competitive input markets firm can max profits by solving: maximize {p · F(K,L) - w·L -r·K} ^ F(K,L) represents quantity produced by setting marginal revenue product of each factor equal to the price set?(Wallace writing there) The above shit is Wallace notes, I don’t think this is helpful, but look if you care. The rest of the study guide is better from here Marginal revenue of product (MRP) is the change in total revenue earned by a firm that results from employing one more unit of labor. TEXTBOOK: The marginal productivity principle states that in competitive factor markets, the profit-maximizing firm will hire or buy the quantity of any input at which the marginal revenue product equals the price of the input. (Look at chapter 19 pages 400-420 for more info) this chapter looks relevant I think Equations for the above: 1. Marginal Revenue Product labor = Marginal Revenue * MPPL 2. Marginal revenue product of capital = Marginal Revenue * MPPK 3. To find Profit Maximizing amount of labor to hire, find MRP of labor: MR*MPPL=w(wage rate) Look at question 2 fall 2003 final for example a. MR · ΔF(K,L)/ ΔL= w 4. To find profit maximizing amount of capital : MR*MPPK= r(rental rate) a. MR · ΔF(K,L)/ ΔK= r This gives the demand curves for K and L. Note that marginal revenue product is simply marginal revenue (price in perfect competive market) · MPPL Thus in Perfectly Competitive Market

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