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
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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 yf xx = (, ~ ). 12 Π = py w x 11 22 ~ . ~ . FC = ~
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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 11 22 ~ .
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WEEK 5-2 ECON2101 S1 2008 Short-Run Iso-Profit Lines Π Π Π Π ′′ Π Π ′′′ I n c r e a s i g p ro f t y x 1 Slopes w p =+ 1
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WEEK 5-2 ECON2101 S1 2008 Short-Run Iso-Profit Lines y w p x wx p =+ + 1 1 22 Π ~ has a slope of + w p 1 and a vertical intercept of Π + p ~ .
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WEEK 5-2 ECON2101 S1 2008 Short-Run Profit-Maximization ± The firm’s problem is to locate the production plan that attains the highest possible iso-profit line, given the firm’s constraint on choices of production plans. ± Q: What is this constraint? ± A: The production function.
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WEEK 5-2 ECON2101 S1 2008 Short-Run Profit-Maximization x 1 I n c r e a s i g p ro f t Slopes w p =+ 1 y y f xx = (, ~ ) 12 Π Π Π Π ′′ Π Π ′′′
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WEEK 5-2 ECON2101 S1 2008 Short-Run Profit-Maximization x 1 y Slopes w p =+ 1 Given p, w 1 and the short-run profit-maximizing plan is And the maximum possible profit is xx 22 ~ , (, ~ ,) .
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This note was uploaded on 05/17/2011 for the course ECON 2103 taught by Professor No during the Fall '10 term at DeVry NJ.

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

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