{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

profit and costF07

# profit and costF07 - Theory of the Firm Rational...

This preview shows pages 1–8. Sign up to view the full content.

Theory of the Firm Rational Decision-Makers: Goal is to maximize profits . Π = - = × T R T C P Q - expenditures on inputs

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

View Full Document
Production Technology The Production Function shows the highest output a firm can produce for every specified combination of inputs. Q F i n p u t s F c a p i t a l l a b o r m a t e r i a l s = = ( ) ( , , . . . )
Production Function Q F K L = ( , ) We will assume 2 generic inputs: Capital (K) Labor (L)

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

View Full Document
Short-Run vs. Long-Run Short-Run: A time period in which quantities of one or more inputs cannot be changed. (The firm has fixed inputs ). Long-Run: Amount of time needed to make all inputs variable.
Short-Run Production Function q f L K = ( , )

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

View Full Document
Marginal Product of Labor: MP L M P Q L L K = MP L is the increase in output resulting from hiring one more hour of labor (holding capital constant). More exactly, it is the rate of change of output with respect to labor. We assume the law of diminishing returns for short-run production functions.
Diminishing Marginal Returns As more labor is combined with a fixed amount of capital , eventually the marginal product of labor will fall.

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

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

{[ snackBarMessage ]}