高级微观经济学 (黄有光) AdMicro-L6-Firms.docVIP

ECC5650 - MicroeconomicTheory Topic 6: The Theory of the Firm Primary Readings: DL – Chapter 3 (Not concerned with the emergence of the firm and why firms exist, but with the behaviour of a profit-maximizing firm. See X. Yang Y-K Ng, Specialization and Economic Organization, 1993, Ch.9 and references therein.) In this lecture, we will analyze the behavioral side of the firm, namely, what would a firm behave. We start with the profit maximization, then discuss the profit function, and end up with the duality issues. 6.1 Profit Maximization A basic assumption of most economic analysis of the firm behavior is that a firm acts so as to maximize its profits, the difference of the revenue and the cost. This leads to the fundamental condition (Production Law): Choose the level of output such that marginal revenue = marginal cost. A firm must also face the decisions on how much of a specific input to use/hire. The second fundamental condition of profit maximization is the condition of equal long-run profits. 6.1.1 The Profit Function Let us return to the general framework where a firm is described by a production possibility set Y ( Rm. Let y (Y be a netput vector and p the associated price vector. Here, p contains component prices for all netputs, inputs, outputs, and quantities that can be either input or output. Profit Function. Let Y be a production possibility set. Then the corresponding profit function is A graphical illustration of the profit function is as follows. If the firm has a single output, the profit function becomes: ((p, w) = max pf(z) – w.z where q = f(z) is the production function of the firm. Then the first-order conditions for this special case are (interior solutions only): That is, the value of the marginal product of each factor must be equal to the factors price. (Do you see that this is a special case of MR = MC?) The diagram below illustrates the above FOC for single input case. The second order condition is as usual: the He