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Advanced Microeconomics Ivan Etzo University of Cagliari ietzo@unica.it Dottorato in Scienze Economiche e Aziendali, XXXIV ciclo Ivan Etzo (UNICA) Lecture 2: Profit Maximization 1 / 35 Overview 1 The model of profit maximization 2 Short-run Profit-Maximization 3 Long-run Profit-Maximization 4 Profit maximization and Returns to Scale 5 The Weak Axiom of Profit Maximization (WAPM) Ivan Etzo (UNICA) Lecture 2: Profit Maximization 2 / 35 The model of profit maximization Aim: to describe how the firm chooses the amount of output to produce and the production plan to employ. Weneed to make some assumptions regarding: 1 The firm’s objective 2 The output market 3 The inputs market Ivan Etzo (UNICA) Lecture 2: Profit Maximization 3 / 35 Economic profit Afirm uses inputs x = 1,2,··· ,m to make products i = 1,2,··· ,n. Output levels are y1,··· yn. Input levels are x1,··· xm. Product prices are p ,··· p . 1 n Input prices are w ,··· w . 1 m Wewill study the profit-maximization problem of a firm that faces competitive markets for both factors of production and output. The competitive firm takes all output prices p ,··· p and all input 1 n prices w ,··· w as given constants. 1 m Ivan Etzo (UNICA) Lecture 2: Profit Maximization 4 / 35
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