PPTChapter5

PPTChapter5 - Prof Clifford B Hawley Managerial Economics...

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Unformatted text preview: Prof. Clifford B. Hawley Managerial Economics Professor Cliff Hawley BADM 631 The firm: Production and Cost (Chapter 5) Prof. Clifford B. Hawley A firm is an entity that transforms inputs into output. What is a firm? One view: the firm capital labor outpu t Prof. Clifford B. Hawley In this view , we can characterize a firm by its production function. Q = f(K,L) What is a firm? here Q is the output produced by combining two factors of production, K and L, i.e. capital and labor Prof. Clifford B. Hawley The firm’s costs then are Total Cost = capital costs + labor costs Its total revenue is the price it gets for output multiplied by the quantity of output it produces. The firm’s goal is to maximize profits-- which is the difference between its revenue and costs Prof. Clifford B. Hawley Mathematically then, Cost side: TC = rK + wL Revenue side: TR = PQ Profits = TR - TC r = price of capital w= price of labor Prof. Clifford B. Hawley Multi-Period Problems: For a view with time explicit, the firm’s goal is to maximize the present discounted value of profits Prof. Clifford B. Hawley Production function may be more complex: Q = f(K,LS,LU) Here output is created by combining the three inputs -- one kind of capital K and two types of labor, skilled and unskilled....
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PPTChapter5 - Prof Clifford B Hawley Managerial Economics...

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