Firm Theory Notes

Firm Theory Eric McDermott University of Minnesota Department of Economics give back 2012 Theory of the ?rm Activities of the ?rm: 1. Acquire reckons (inputs) at prices determined on factor markets 2. Combine factors according to technical possibilities to produce make. 3. Sell yield on achievement (output) markets at prices determined in those markets. 4. Owners view as as pro?t the di?erence between: Revenue from 3.) and bell from 1.) Objelelectroconvulsive therapyroconvulsive therapyive: Maximize pro?t This guides only decisions ?rms make in our model. Producers: A ?rm produces output (Q) from input factors (K,L) ( slap-up, labor), using a production technology. A action Function: relates inputs to outputs: Q = f (K , L) When we looked at consumers we talked of indi?erence curves which held all points which yielded the like take aim of utility for the consumer. Now we forget de?ne the capital-labor combinations that yield the same output for a ?rm. Q 0 -level isoquant ? all(prenominal) combinations of (K,L) that produce Q0 succumbn f. ? {(K , L)|f (K , L) = Q0 } Isoquants are similar to indi?erence curves but here, song matter for to a greater extent than order. Whereas ICs are ordinal, Isoquants are Cardinal ? Isoquants give meaningful amount for production levels. ? This allows us to compare the e?ectiveness of production functions.  bare(a) Rate of Technical Substitution (MRTS)- sacrosanct value of the run of the isoquant.

9 8 7 6 5 A dK Qo-isoquant K 4 3 2 1 0 0 1 2 3 4 L 5 6 7 8 B dL C Going from A to B, we know that ?Q = 0, since A and B are on the same isoq uant. A?C : C ?B: Notice that: Q ? ?f (K ,L! ) ? MPK ? bare(a) product of capital K L regular K Q ? ?f (K ,L) ? MPL ? marginal product of labor L K constant L ?Q ?K L ?Q ?L K constant = e?ect of ?K on output = e?ect of ?L on output. constant Thus the total e?ect is: (rewriting *) MPK ? ?K + MPL ? ?L = 0 =? =? =? ? MPL ? ?L = ?MPK ? ?K ?K MPL =? = neg(slope of isoquant) MPK ?L MPL(K ,...If you want to get a across-the-board essay, order it on our website: OrderEssay.net

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