1 / 7

Profit Maximization

Profit Maximization. What is the goal of the firm? Expand, expand, expand: Amazon. Earnings growth: GE. Produce the highest possible quality: this class. Many other goals: happy customers, happy workers, good reputation, etc.

Ava
Télécharger la présentation

Profit Maximization

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Profit Maximization • What is the goal of the firm? • Expand, expand, expand: Amazon. • Earnings growth: GE. • Produce the highest possible quality: this class. • Many other goals: happy customers, happy workers, good reputation, etc. • It is to maximize profits: that is, present value of all current and future profits (also known as net present value NPV).

  2. Profit • Profits=revenue-costs • Two inputs x1 and x2 with input prices w1 and w2. Inputs can be labour, rent, parts, etc. • Two outputs y1 and y2 with output prices p1 and p2. • A competitive firm takes prices as given. • What are profits? • Note that inputs and outputs can be internal to the firm.

  3. One input, one output • There is one output y and one input x where y=f(x). • The firms problem is the maximize Max x,y p*y-w*x s.t. y=f(x). • Two ways: 1. Draw isoprofit lines (where profit is constant). Find which is the highest profit line that can be reached with the production function. 2. Substitute in for y and take FOC and solve.

  4. Past, Present and Future • What happens if some decisions are already made in the past? • Remember one can’t change the past. • Euro-tunnel: spend billions to build it. Does this mean that prices have to be higher for tickets? • Similar for Airwave Auctions, Iridium and many other cases.

  5. Past costs are sunk. • y=f(x1,x2), but x2 is already paid for and fixed. • This problem is the same as our problem with just one variable. • Try this w/ Cobb-Douglas • What happens to output when p and w1 change?

  6. In the Long run.. • We can choose both variables. We then need to take FOCs of both. • Focs are p*f1(x1,x2)=w1 and p*f2(x1,x2)=w2. (remember f1(x1,x2)= MP1) • What is output in the C-D case as a function of prices?

  7. Returns to Scale • If production is decreasing-RS, then solution is simple. • If production is increasing-RS then “Houston, we have a problem.” • If production is constant-RS, then • If profits are negative then firms produce zero. • If profits are positive then firms can keep producing to increase profits. Result output prices decrease and input prices increase. • Result: if market is competitive w/ CRS there are zero profits for each firm!! • Some economists claim any DRS is just CRS with less inputs. Think of CD.

More Related