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Unformatted text preview: Econ 101 Lecture 9 Firms 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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