A11 Profit Maximizat - Frank Chapter 11(Blue Book Starting with the production function q = L1/3K2/3 answer the following four questions 1 Suppose

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Frank Chapter 11 (Blue Book) Starting with the production function, q = L 1/3 K 2/3 , answer the following four questions 1. Suppose K = 27, wages are $9 and the opportunity cost of capital (price of capital) is $1, and the price of the output is $300 in a competitive industry, how much should the firm produce?
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1) Formulas a) Total revenue i) TR = P(q)*q ii) Why little q? Because the firm can only control their output, all other firm’s outputs are assumed to be given and fixed, though in reality and more complex models, this may not be true. Even in reality, given the range of activity, the change in price is very small. b) Total Costs i) TC = c(q) ii) TC = c(K,L,N) c) Profit i) Pi = TR – TC ii) Pi = P(q)*q – c(q) iii) Pi = P(q)*q – c(K,L,N) d) Maximization i) DPi/dq = dTR/dq – dc(q)/dq = 0 ii) MR = dTR/dq = dc(q)/dq = MC iii) Produce until the last unit brings in as much revenue as it costs to make, so long as earlier units brought in more that they cost (positive but declining
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This note was uploaded on 04/10/2008 for the course ECON 3150 taught by Professor Tittle during the Spring '08 term at Georgia Institute of Technology.

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A11 Profit Maximizat - Frank Chapter 11(Blue Book Starting with the production function q = L1/3K2/3 answer the following four questions 1 Suppose

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