Profit Maximization- Micro Theory

What is the assumption made about a firm’s production plan?

Firms are always looking to profit maximize.

What assumption is made about a competitive firm?

A competitive firm will take all output prices and input prices as given constraints

What is formula for a profit-based production plan?

Profit (π) = p1y1 + .. pnyn - w1×1- …wmxm

What is a firm’s iso-profit line?

This is the line that contains all the production plans that provide a profit level of $π. The iso-profit line is represented by the equation π = py - w1×1 - w2×2 (where input 2 is a fixed cost).

What is another way to write the iso-profit equation?

We could also think of this equation as output is equal to cost of input one over price times input one plus profit plus cost of input 2 times input 2 over price.

What is the condition that must be met for profit maximization?

Marginal revenue has to be equal to marginal cost.

What would happen if marginal revenue was less than marginal cost?

If this was the current condition [p x MP1 < w1], then profit would decrease with a rise in input 1.

What would happen if marginal revenue was greater than marginal cost?

If [p x MP1 < w1], then profit would increase with a rise in input 1.

How many production plans does a competitive firm with decreasing returns to scale have ?

They will have one single long run profit-maximizing production plan.

How many production plans does a competitive firm with increasing returns to scale have?

A competitive firm will have more than one production plan because they have more options to allocate for profit maximization.

How many production plans does a competitive firm with constant returns to scale have ?

This firm production plans require a firm to earn economic profits of zero, since a competitive firm’s positive economic profit is inconsistent