16-Profit Max in LR

16-Profit Max in LR - Profit Maximization: Choosing Output...

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1 Profit Maximization: Choosing Output in the Long-Run Reading: Chapter 8
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2 Choosing Output in the LR In the long run, a firm can alter all its inputs, including the size of the plant (K) LR output rule of profit-maximizing firm: LRMC = P LR individual firm’s supply curve: LRMC above the minimum of LRAC curve (all costs are variable in LR) In the LR, if profit is negative – shut down!
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3 q 1 B C A D In the short run, the firm is faced with fixed inputs. P = $40 > ATC. Profit is equal to ABCD. Output Choice in the Long Run Price Output P = MR $40 SAC SMC q 3 q 2 $30 LAC LMC
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4 Output Choice in the Long Run Price Output q 1 B C A D P = MR $40 SAC SMC q 3 q 2 $30 LAC LMC In the long run, the plant size will be increased and output increased to q 3 . Long-run profit, EFGD > short run profit ABCD. F G E
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5 Accounting Profit vs. Economic Profit Accounting profit: difference between firm’s revenues and direct costs Economic profit: difference between firm’s revenues and direct and opportunity costs Example: even if a firm owns K, it still accounts for its user cost: R wL rK π= - -
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This note was uploaded on 10/24/2009 for the course ECON 201 taught by Professor Wana during the Spring '08 term at University of Iowa.

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16-Profit Max in LR - Profit Maximization: Choosing Output...

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