101-2011-L9

101-2011-L9 - Econ 101 Lecture 9 Firm’s problem A closed...

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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 146-154 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 Cobb-Douglas 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 Cobb-Douglas Production...
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101-2011-L9 - Econ 101 Lecture 9 Firm’s problem A closed...

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