Intermediate Microeconomics Ch19 notes

Intermediate - Ch 19 Profit Maximization This chapter models how a firm chooses the amount to produce and the method of production to employ for

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1 Ch 19. Profit Maximization This chapter models how a firm chooses the amount to produce and the method of production to employ for maximizing its profits. The firm takes the prices as given (i.e., prices are beyond its control) in competitive markets for its inputs and output. 19.1 Profits Profits π are defined as revenues py (= R) minus costs = n i i i x w 1 (= C), where p is the price of output that is produced from n inputs, and w i is the price of factor i : = = n i i i x w py 1 In calculating economic profits, we need to include all inputs and value them at their opportunity costs (OC). And, all variables are measured in flow units. E.g., if you work in your own firm, your labor is an input and should be counted as a cost even if you are not to be paid at a wage rate (which is the OC of your working for yourself). For machines, we have to use its (implicit) rental rate , at which a machine is thought of as being rented for use in a given period of time even if the firm may have bought it. E.g., you bought a machine for $1M that has been used for 3 years. The annual rate of interest was 5% in this period. Today you sold it for $0.7M to terminate production. Then, the total cost of using this machine was $152,542 per year. We omit sections 19.2 and 19.3 in the text. You should read them on your own. In simple cases, it suffices to examine the firm’s behavior of profit maximization. 19.2 Fixed and Variable Factors In a given period of time, a factor of production that is used in a fixed amount by the firm is called a fixed factor , while a factor that can be used in different amounts is referred to as a variable factor . In the SR , there are some fixed factors, whereas in the LR , all factors are variable factors. There is no rigid boundary between the SR and the LR. Some of the factors of production are fixed in the SR but variable in the LR. Quasi fixed factors
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This note was uploaded on 04/05/2009 for the course ECIF ECIF201 taught by Professor Gu during the Spring '09 term at University of Manchester.

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Intermediate - Ch 19 Profit Maximization This chapter models how a firm chooses the amount to produce and the method of production to employ for

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