Chapter 19

# Chapter 19 - MP1= w1/p 19.7 Comparative Statics As the...

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Chapter 19: Profit Maximization 19.1 Profits Profits are defined as revenues-costs. 19.2 The Organization of Firms 19.3 Profits and Stock Market Value 19.4 The Boundaries of the Firm 19.5 Fixed and Variable Factors 19.6 Short Run Profit Maximization (x1) Max p f (x1,x2) – w1x1-w2x2 (p is price of outputs, w is price of inputs) If x1* is the profit maximizing choice of factor 1, then the output price times the marginal product of factor 1 should equal the price of factor 1: pMP1(x1*,x2)=w1 ; the value of the marginal product of a factor should equal its price isoprofit lines: y =(pi/p) + (w2/p)(x2)+ (w1/p)(x1) pi is a constant level of profit. As pi varies, we get a family of parallel straight lines, each with slop w1/p and each having a vertical intersect of pi/p + w2x2/p, which measures the profits plus the fixed costs of the firm Higher levels of profit will be associated with isoprofit lines with higher vertical intercepts

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Unformatted text preview: MP1= w1/p 19.7 Comparative Statics As the price for factor 1 increases, the demand for factor 1 must decrease, factor demand curves must slope downward If you change the price of factor 2, this has no effect on the optimal choice of factor 1, or the supply of output, only on the profits. –short tun 19.8 Profit Maximization in the Long Run (x1, x2) max p f( x1, x2) –w1x1 – w2x2 pMP1(x1*,x2*)=w1 pMP2(x1*,x2*)=w2 19.9 Inverse Factor Demand Curves pMP1(x1, x2*) =w1 19.10 Profit Maximization and Returns to Scale The only reasonable long run level of profits for a competitive firm that has constant returns to scale at all levels of output is a zero level of profits 19.11 Revealed Profitablility p y- w1 x1- w2 x2>=0 ∆ ∆ ∆ ∆ ∆ ∆ 19.12 Cost Minimization...
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