Chapter Nineteen Profit-Maximization
Chapter Nineteen Profit-Maximization
Economic Profit A firm uses inputs j 1...,m to make products i =1,...n. Output levels are y1,...,yn. Input levels are x1,...,Xm Product prices are p1,...,Pn. Input prices are w1,...,Wm
Economic Profit A firm uses inputs j = 1…,m to make products i = 1,…n. Output levels are y1 ,…,yn . Input levels are x1 ,…,xm. Product prices are p1 ,…,pn . Input prices are w1 ,…,wm
The Competitive Firm The competitive firm takes all output prices p,...,Pn and all input prices W1,...,Wm as given constants
The Competitive Firm The competitive firm takes all output prices p1 ,…,pn and all input prices w1 ,…,wm as given constants
Economic Profit The economic profit generated by the production plan (X1,...,Xm,y1,..,yn)is II=Piy1++Pnyn-W1X1-WmXm
Economic Profit The economic profit generated by the production plan (x1 ,…,xm,y1 ,…,yn ) is = p1 y1 ++pn yn=− w1 x1 −wmxm
Economic Profit Output and input levels are typically flows. E.g.x might be the number of labor units used per hour. And y3 might be the number of cars produced per hour. Consequently,profit is typically a flow also;e.g.the number of dollars of profit earned per hour
Economic Profit Output and input levels are typically flows. E.g. x1 might be the number of labor units used per hour. And y3 might be the number of cars produced per hour. Consequently, profit is typically a flow also; e.g. the number of dollars of profit earned per hour
Economic Profit How do we value a firm? Suppose the firm's stream of periodic economic profits isΠo,Πi, Π2，.and r is the rate of interest. Then the present-value of the firm's economic profit stream is PV=Π0+ 1+Π2 1+r(1+r)
Economic Profit How do we value a firm? Suppose the firm’s stream of periodic economic profits is 0 , 1 , 2 , … and r is the rate of interest. Then the present-value of the firm’s economic profit stream is PV r r = + + + + + 0 1 2 1 2 (1 )
Economic Profit A competitive firm seeks to maximize its present-value. How?
Economic Profit A competitive firm seeks to maximize its present-value. How?
Economic Profit Suppose the firm is in a short-run circumstance in which x2 =X2. Its short-run production function is y=f(X1,x2)
Economic Profit Suppose the firm is in a short-run circumstance in which Its short-run production function is y = f(x ,x ~ ). 1 2 x2 x2 ~
Economic Profit Suppose the firm is in a short-run circumstance in which x2 =X2. Its short-run production function is y=f(X1,x2) The firm's fixed cost is FC w2X2 and its profit function is Π=py-W1x1-W2x2
Economic Profit Suppose the firm is in a short-run circumstance in which Its short-run production function is The firm’s fixed cost is and its profit function is y = f(x ,x ~ ). 1 2 = py − w1 x1 − w2 x2 ~ . x2 x2 ~ . FC = w2 x2 ~
Short-Run Iso-Profit Lines A $II iso-profit line contains all the production plans that provide a profit level$Π. A $II iso-profit line's equation is Π=py-w1X1-W2x2:
Short-Run Iso-Profit Lines A $ iso-profit line contains all the production plans that provide a profit level $ . A $ iso-profit line’s equation is py − w1 x1 − w2 x2 ~