Chapter19 - Chapter 19 Profit Maximization 1 Profits defined to be revenues minus costs(a value each output and input at its market price even

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Unformatted text preview: Chapter 19 - Profit Maximization 1. Profits defined to be revenues minus costs (a) value each output and input at its market price - even if it is not sold on a market. (b) it could be sold, so using it in production rather than somewhere else is an opportunity cost. (c) measure in terms of flows - in general, maximize present value of flow of profits. 2. Short-run and long-run maximization (a) fixed factors - plant and equipment (b) quasi-fixed factors - can be eliminated if operate at zero output (advertising, lights, heat, etc.); otherwise fixed amount if output is positive 3. Short-run profit maximization (see figure 19.1. in the textbook) (a) max pf (x) − wx (b) FOC: pf ′ (x∗ ) − w = 0 (c) in words: the value of the marginal product equals wage rate (d) comparative statics: change w and p and see how x and f (x) respond 4. Long-run profit maximization (a) p∂f /∂x1 = w1 , p∂f /∂x2 = w2 (b) solve system for factor demand funtions and then get output supply function 5. Profit maximization and returns to scale (a) constant returns to scale implies profits are zero • note that this doesn’t mean that economic factors aren’t all appropriately rewarded (b) increasing returns to scale implies competitive model doesn’t make sense 1 ...
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This note was uploaded on 12/09/2010 for the course ECON 206 taught by Professor Ioanadan during the Summer '10 term at University of Toronto- Toronto.

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