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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. Shortrun and longrun maximization (a) ﬁxed factors  plant and equipment (b) quasiﬁxed factors  can be eliminated if operate at zero output (advertising, lights, heat, etc.); otherwise ﬁxed amount if output is positive 3. Shortrun 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. Longrun 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.
 Summer '10
 IOANADAN

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