This preview shows pages 1–4. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: ECON 306 Chapter 19: Profit Maximization RUST, CHO, DIAZ Profits x Economic Profits revenues minus costs. x Need to include all factors of production used by the firm. x Each factor should be valued at its market price. x What if the firm owns the input? opportunity costs . x Denote the price of output i by i p , and the price of input j by j w . x General case with n outputs and m inputs: Cost 1 Revenue 1 S m j j j n i i i x w y p . x Our particular case, one output and two inputs: 2 2 1 1 2 1 ) , ( x w x w x x f p y S . x Measured in flow terms. Competitive model we will assume that firms take price of its product and prices of inputs as given. ShortRun Profit Maximization x In the short run some inputs are fixed. x The firm chooses the optimal level of variable inputs. x Assuming input 2 is fixed in the short run, the maximization problem is 2 2 1 1 2 1 1 ) , ( max x w x w x x pf x x The firstorder condition (FOC) for maximization is: , 1 1 1 2 * 1 1 1 1 ) 2 , 1 ( ) , ( factor of price factor of MP of value x x x f w x x pMP w p w w . x Therefore, the value of the marginal product of a factor should equal its price. x Graphic derivation of the optimality condition. From the profit equation 2 2 1 1 x w x w py S get the isoprofit lines : 2 2 1 1 x x y p w p w p S . x The profitmaximization problem is then to find the point on the production function that has the highest associated isoprofit line....
View
Full
Document
This note was uploaded on 10/25/2011 for the course ECON 326 taught by Professor Hulten during the Spring '08 term at Maryland.
 Spring '08
 Hulten

Click to edit the document details