V19 - © 2010 W W Norton& Company Inc 19...

Info iconThis preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: © 2010 W. W. Norton & Company, Inc. 19 Profit-Maximization © 2010 W. W. Norton & Company, Inc. 2 Outline ◆ Economic profit ◆ Short-run profit maximization – Comparative statics ◆ Long-run profit maximization ◆ Profit maximization and returns to scale ◆ Revealed profit maximization © 2010 W. W. Norton & Company, Inc. 3 Economic Profit ◆ A firm uses inputs j = 1…,m to make products i = 1,…n. ◆ Output levels are y 1 ,…,y n . ◆ Input levels are x 1 ,…,x m . ◆ Product prices are p 1 ,…,p n . ◆ Input prices are w 1 ,…,w m. © 2010 W. W. Norton & Company, Inc. 4 The Competitive Firm ◆ The competitive firm takes all output prices p 1 ,…,p n and all input prices w 1 , …,w m as given constants. © 2010 W. W. Norton & Company, Inc. 5 Economic Profit ◆ The economic profit generated by the production plan (x 1 ,…,x m ,y 1 ,…,y n ) is . 1 1 1 1 m m n n x w x w y p y p -- + + = Π © 2010 W. W. Norton & Company, Inc. 6 Economic Profit ◆ Output and input levels are typically flows. ◆ E.g. x 1 might be the number of labor units used per hour. ◆ And y 3 might be the number of cars produced per hour. ◆ Consequently, profit is typically a flow also; e.g. the number of dollars of profit earned per hour. © 2010 W. W. Norton & Company, Inc. 7 Economic Profit ◆ How do we value a firm? ◆ Suppose the firm’s stream of periodic economic profits is Π , Π 1 , Π 2 , … and r is the rate of interest. ◆ Then the present-value of the firm’s economic profit stream is PV r r = + + + + + Π Π Π 1 2 2 1 1 ( ) © 2010 W. W. Norton & Company, Inc. 8 Economic Profit ◆ A competitive firm seeks to maximize its present-value. ◆ How? © 2010 W. W. Norton & Company, Inc. 9 Economic Profit ◆ Suppose the firm is in a short-run circumstance in which ◆ Its short-run production function is y f x x = ( , ~ ). 1 2 x x 2 2 ≡ ~ . © 2010 W. W. Norton & Company, Inc. 10 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 ~ © 2010 W. W. Norton & Company, Inc. 11 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 ~ . © 2010 W. W. Norton & Company, Inc. 12 Short-Run Iso-Profit Lines ◆ A $ Π iso-profit line contains all the production plans that yield a profit level of $ Π . ◆ The equation of a $ Π iso-profit line is ◆ I.e. Π ≡ - - py w x w x 1 1 2 2 ~ . y w p x w x p = + + 1 1 2 2 Π ~ . © 2010 W. W. Norton & Company, Inc....
View Full Document

{[ snackBarMessage ]}

Page1 / 106

V19 - © 2010 W W Norton& Company Inc 19...

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online