November 14, 2015

Ch. 20 Profit Maximization - Summary - Intermediate Microeconomics - Varian


In this chapter,  a model of how the firm chooses the amount to produce and the method of production to employ based on the criterion of profit maximization is described.

We  assume that the firm faces fixed prices for its inputs and outputs. Where the individual purchasers have no effect on the prices is a competitive market. Hence we are studying the profit-maximization problem of a firm that faces competitive markets for the factors of production
it uses and the output goods it produces.

20.1 Profits

A. Profit: Revenues - costs

Each output and input valued at its market price: Opportunity cost
Measure in terms of flows

B. Short-run and long run maximization

Fixed factors
Quasi-fixed factors - eliminated at zero output

C. Short-run profit maximization

(1) max pf(x)-wx

(2) optimum when value of marginal product = price of (variable) input

D. Long run profit maximization

All factors are variable

E. Profit max and returns to scale

(1) Constant returns implies profits are zero

        But - all factors are rewarded at opportunity cost

(2) Increasing returns to scale:

        Competitive model doesn't make sense

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