Lecture Notes 6

Lecture Notes 6 - Some I mpor tant Extensions Role of bankr...

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Unformatted text preview: Some I mpor tant Extensions Role of bankr uptcy Long-r un ver sus shor t-r un mar ginal cost and competitive dynamics Ricar dian competition Competitive mar kets and income distr ibution Bankr upt cy vs Shut down Revenue < Avoidable cost leads t o shut down Bet t er for all if firm remains operat ing as long as Revenue > Avoidable cost Capit al invest ment funded by debt and equit y Debt is mor e "senior" -- get s r epaid befor e before dividends t o shareholders I f r evenues insufficient t o "ser vice debt ," firm may seek t he pr ot ect ion of bankrupt cy. Bankr upt cy court organizes financial claims against fir m in or der t o enable cont inued operat ion, and maybe even r e-financing. Bonds may remain wit h some value. Long-r un vs Shor t -r un Mar ginal Cost s Short -run tot al cost L ong-run t ot al cost is lower envelope of short r un t ot al cost cur ves. Marginal cost s are the slopes. Q* Where shor t -r un cost equals long r un cost , long-r un marginal cost equals shor t -r un mar ginal cost . Wher e out put is low, so capacity is in excess, SRMC<L RMC. Wher e out put is high, so capacit y is t ight, SRMC>L RMC. Ricar dian Compet it ion Pay in Compet it ive Mar ket s Marginal r at e of t echnical subst it ut ion (MRTS) = (Marginal pr oduct of L)/(Mar ginal pr oduct of K) = w/r (the t angency condit ion), wher e t her e is cost minimization for the target out put level Marginal cost = w (L / Q) = w / (Q / L) = w /(mar ginal pr oduct of labor) Price = mar ginal cost Price = w /(mar ginal pr oduct of labor ) (Pr ice)(mar ginal product of labor) = wage Elast icit y of out put wit h r espect t o labor = (Q / Q) / L / L) = (Q/ L)(L)/ (Q) = (marginal pr oduct of labor ) (L )/(Q) (wage)(L ) = Q(Pr ice)(mar ginal pr oduct of labor )(L )/(Q) (Tot al payment s t o labor ) / (Tot al value of out put ) = Elast icit y of out put wit h respect t o labor ...
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This note was uploaded on 04/07/2008 for the course ECO 100 taught by Professor R.willig during the Spring '08 term at Princeton.

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Lecture Notes 6 - Some I mpor tant Extensions Role of bankr...

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