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Unformatted text preview: 4. Competitive Firms I. Profit Maximizing A. The core behavioral assumption about firms in economics is that they act to maximize profits. 1. We now have two behavioral assumptions about firms (profit maximization and cost mini mization). 2. These two behavioral assumptions always lead to the same behavior (e.g. same production decisions). B. The core behavioral assumption of competitive firms is that they are price takers. 1. When minimizing costs, the firm takes factor prices as given. 2. When maximizing profits, the firm takes sale prices as given. a. Notice that firms dont need to worry about sales prices in the cost minimization version of the consumers problem. b. One reason why attention is often focused on cost functions! C. The firms problem. 1. The short run version. a. Once again, we simply hold a factor fixed. max pf ( x v , x f ) w v x v w f x f b. Solving this problem, we get that the value of the marginal product must be equal to its price! Ex: Graphical representation of the consumers problem. Ex: CobbDouglas done the other way. 2. Price changes a. Increasing the price of a factor will obviously decrease the firms factor demand. Ex: Differentiating FOC by w . Ex: Graphical representation of factor price increase. b. Increasing the price of output y however will increase the firms factor demand. Ex: Differentiating FOC by p . Ex: Graphical representation of product price increase. 3. The long run version a. In the long run the problem is exactly the same except that the firm chooses both factors. max pf ( x v ,x f ) w v x v w f x v b. Values of each marginal product have to equal respective prices....
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This note was uploaded on 09/29/2010 for the course ECON 200 taught by Professor Oprea during the Fall '09 term at UCSC.
 Fall '09
 oprea

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