Week 7_Part II

# Week 7_Part II - Profit maximization Chapter 19 Varian...

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Profit maximization Chapter 19, Varian

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WEEK 5-2 ECON2101 S1 2008 Preliminaries Output level y = f(x 1 ,x 2 ) Product price p Revenue = py = pf(x 1 ,x 2 ) Inputs: x 1 ,x 2 . Input prices: w 1 ,w 2. Costs = w 1 x 1 + w 2 x 2 Profits = Revenue – Costs = pf(x 1 ,x 2 ) - w 1 x 1 - w 2 x 2
WEEK 5-2 ECON2101 S1 2008 Maximizing Profits Long run profit maximization problem Taking p , w 1 and w 2 as given each firm chooses x 1 ,x 2 .to maximize profits Short run profit maximization problem Some inputs are fixed. Let x2 be the fixed input. Taking p , w 1 and w 2 as given each firm chooses x 1 to maximize profits We will begin with the short run problem first

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WEEK 5-2 ECON2101 S1 2008 Economic Profit Suppose the firm is in a short-run circumstance in which Its short-run production function is The firm’s fixed cost is and its profit function is y f x x = ( , ~ ). 1 2 Π = py w x w x 1 1 2 2 ~ . x x 2 2 ~ . FC w x = 2 2 ~
WEEK 5-2 ECON2101 S1 2008 Short-Run Iso-Profit Lines A \$ Π iso-profit line contains all the production plans that provide a profit level \$ Π . A \$ Π iso-profit line’s equation is Π ≡ py w x w x 1 1 2 2 ~ .

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WEEK 5-2 ECON2101 S1 2008 Short-Run Iso-Profit Lines Π Π Π Π ′′ Π Π ′′′ Increasing profit y x 1 Slopes w p = + 1