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disc7 - DISCUSSION SECTION 7 Profit Maximization Objective...

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DISCUSSION SECTION 7 Profit Maximization Objective of the firm : Profit Maximization Producers have a technology, which is given by the production function ) ,... , ( 2 1 n x x x f y = , where x 1 ,….x n are inputs. Given their technology, output price (p) and input prices (w 1 ,..w n ), they choose the level of inputs (x 1 ,…x n ) to maximize profits Short Run VS Long Run (SR: At least one input is fixed; usually capital) Returns to Scale ------------------------------------------------------------------------------------------------------------ QUESTION 1 (Profit Maximization- Short run) GMC is producing cars using machines (K) and labor (L). The production function is given by 2 1 4 3 ) , ( L K L K f = The value of GMC physical capital (machines, real estate etc.) is equal to K = \$16 billon (in calculations ignore billions). We analyze the behavior of the firm in the short run, i.e. in the period when this value cannot be changed. Suppose the price of a car is equal to p, the wage rate is w and the price for K is \$1 (w k =1). a) Write down profit as a function of L.

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