L15 Producers

Producers Producers: have a technology Technology given by production function Two inputs: Capital and Labor Example MPL and MPK (decreasing) Short and Long run (fixed K or not) Constant Returns to Scale

Short Run (fixed K) Profit maximization Price taking Example (Short run)

Short run: Demand for Labor

Labor Market: Equilibrium Capital Preferences Taxes

Labor Market: Minimal Wage

Long run ( not fixed) We choose simultaneously and

Long run

Profit Maximization and CRS Suppose that are optimal What can we say about at ? Profit maximization not always well defined

Cost Minimization Profit maximization: two stages Managers: how much to sell Engineers: How to produce it with Today: second stage - cost minimization! Technology + input prices = cost function Geometrically: Isoquants and Isoprofit c

Technical Rate of Substitution (TRS)

Cost Minimization: Geometry

Arbitrary y

Returns to Scale and Cost F.

Fixed Cost and Sunk Cost Fixed costs: costs that are independent from the level of production Sunk Costs: Fixed costs that cannot be recovered.