THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMSRecall the three decisions a firm has to make:1.How much2.Which production3.How much ofoutput tosupplytechnologyto useeach input todemandThe Three Decisions That All Firms Must Make2 of 33
Alternative Technologies•There are many ways to produce the same level ofoutput using different combinations of capitalequipment and labor.•Example:There are multiple ways to get your carwashed: the automated car washes (very Kintensive), OR, you could get it washed by a bunch of14‐year‐olds at a charity car wash (very labor)hhh d bhintensive). Either way the car gets washed, but thereare different amounts of capital and labor employed.•What determines how these inputs will be used tomake a particular product? Normally the relative costof each input.3 of 33
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Textbooks•Example: Suppose there are 2 ways to produce10,000 Economics Textbooks:•Method 1: 1 Computerized Press, 1 operator•Method 2: 100 Manual Presses, 100 Operators•The job of the engineer is to provide theseoptions to management. The engineer cannotchoose which method to use…that’st’ j bHldtmanagement’s job. How would managementdecide? Management would need to examinethe market‐generated prices for each input.the market generated prices for each input.4 of 33