profit and costF07

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

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Theory of the Firm Rational Decision-Makers: Goal is to maximize profits . Π = - = × T R T C P Q - expenditures on inputs
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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 = = ( ) ( , , . . . )
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Production Function Q F K L = ( , ) We will assume 2 generic inputs: Capital (K) Labor (L)
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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.
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Short-Run Production Function q f L K = ( , )
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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.
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As more labor is combined with a fixed amount of capital , eventually the marginal product of labor will fall. Note:
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This note was uploaded on 04/07/2008 for the course ECO 210 taught by Professor Sun during the Fall '08 term at Grand Valley State.

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

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