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Unformatted text preview: Lecture 9 1minute review Competitive firms described by production function buy arbitrary amount of inputs at market prices sell arbitrary amount of outputs at market prices maximize profit = revenue  cost 1 Production function f ( k,` ) Cost function: C ( p k ,p ` ,q ) = cost of q units of output when prices are p k ,p ` Minimize p k k + p ` ` subject to f ( k,` ) = q Solve by Lagrangian method 2 Lagrangian L = p k k + p ` ` [ f ( k,` ) q ] FOC p k f k = 0 p ` f ` = 0 f ( k,` ) q = 0 Solve the first two for and get f k p k = f ` p ` RTS = f k f ` = p k p ` = slope of price line 3 p = price of output Profit = Revenue  Cost ( p,p k ,p ` ) = pq C ( q ) Maximize: onevariable problem 4 Example: CobbDouglas f ( k,` ) = k 1 / 2 ` 1 / 4 p k = 20 ,p ` = 10 ,p = 100 find cost function C ( p k ,p ` ,q ) set profit function = ( p,p k ,p ` ) = pq C ( q ) maximize 5 1) Find cost function RTS = slope (1 / 2) k 1 / 2 ` 1 / 4 (1 / 4) k 1 / 2 ` 3 / 4 = 20 10 2 k ` = 2 k = ` 6 Plug into constraint k 1 / 2 k 1 / 4 = q k = q 4 / 3 ` = q 4 / 3 C ( q ) = 30 q 4 / 3 7 Profit function...
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 Fall '07
 McDevitt

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