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Unformatted text preview: Econ 101 Lecture 9 Firm’s problem A closed economy model Announcements n Today we will finish Chapter 4 and do Chapter 5, pages 146154 The Aggregate Production Function n Y is output (think of it as GDP) n K is capital (plants, equipments, etc.) n exogenous in our static model, will become endogenous later n Nd is labor , chosen by the firm n z is total factor productivity (TFP) ) , ( d N K zF Y = Summing up: properties of the technology n Constant returns to scale n Positive marginal products of labor and capital n Decreasing marginal products of labor and capital n Marginal product of one input increases with the quantity of the other input (labor and capital are complements in production) Profit maximization § The representative firm chooses how much labor to hire in order to maximize profits, given capital and the production technology: § You should remember from introductory microeconomics that profits are maximized when Marginal revenue = marginal costs cost revenue ) , ( profits d d wN N K zF = Profit Maximization Profit maximization cost revenue ) , ( profits d d wN N K zF = MC MR N d = : optimal w MP N = Labor demand w N* Labor demand The CobbDouglas Production Function § In the early 1920s economist Paul Douglas asked mathematician Charles Cobb to provide him with a production function implying constant factor shares I need the damn production function tonight Charles, OK?!? The CobbDouglas Production...
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 Fall '08
 DUMBASS

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