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204_summer_2009_lecture_6

204_summer_2009_lecture_6 - University of Toronto...

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University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 6 1 Ajaz Hussain. Department of Economics
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Today “Black Box” Firm Modeling producer technology Production function Long vs. Short Run Representing technology Interesting production functions: Cobb Douglas production function Complements production function Linear production function Quasi Linear production function CES production function 2 Ajaz Hussain. Department of Economics
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Simple “Black Box Model” of a Firm In the black box model firm transforms inputs into output “Inputs” don’t have to be capital and labor Assume: Firm purchases inputs at uniform prices as a price taker Produces single output The black box focuses on inputs being transformed into output: deliberately ignore “intra firm” issues Ajaz Hussain 3 Firm Output Input(s)
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Consumer vs. Producer Theory CONSUMER Preferences Given (but can be affected) Utility function MRS Utility Maximization P 1 , P 2 , Y given Max Utility s.t. Expenditure Income Demand for Q 1 , Q 2 Optimized utility PRODUCER Technology Choice Production function MRTS Cost Minimization P K , P L , q given Min Cost s.t. Output produced q Demand for K, L Optimized cost Long, short run cost functions Ajaz Hussain. Department of Economics 4
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