Chapter 13: Profit maximization

Question 1

competitive markets

Answer 1

competitive markets: in both the product market and the factor markets, the firm in concern is a price taker.

Question 2

A fixed factor

Answer 2

A fixed factor is a factor of production that can only be used in a fixed
amount. Some factors of production are fixed in the short run.

Question 3

A variable factor

Answer 3

A variable factor is a factor of production that can be used in different amounts. All factors of production are variable in the long run.

In the short run, a firm can make negative profits. In the long run, the least profits a firm can make are zero profits.

Question 4

Quasi-fixed factors

Answer 4

Quasi-fixed factors are factors of production that must be used in a fixed
amount, independent of the output, as long as the output is positive.

Question 5

An isoprofit line

Answer 5

An isoprofit line gives all the combinations of the input goods and the output good that give a constant level of profit.
Higher levels of profit will be associated with isoprofit lines with higher vertical
intercepts.

Question 6

Comparative statics

Answer 6

Comparative statics of firm behavior: how a firm’s choice of inputs and 2outputs varies as the prices of inputs and outputs vary.

Question 7

Factor demand curves

Answer 7

Factor demand curves measure the relationship between the price of a factor
and the profit maximizing choice.

Question 8

The inverse factor demand curves

Answer 8

The inverse factor demand curves measure what the factor prices must be for some given quantity of inputs to be demanded.

Question 9

opportunity costs,

Answer 9

All factors should be valued at their market rental prices and should reflect the
opportunity costs, not the historical costs.
* For instance, the imputed wage of the owner should be included, the
imputed rental rate of the machine should be included

Question 10

The profit maximization problem is to

Answer 10

find the point on the production
function that has the highest associated isoprofit line. The slope of the
production function should be equal to the slope of the isoprofit line.

Question 11

Firms are trying to maximize profits. How can it be that they only get 0 profit in the long run?

If the firm expands indefinitely:

Answer 11

• The firm could get so large that it cannot operate efficiently, so constant returns to scale may not be valid.
• The firm could get so large that it dominates the market. Competitiveness may not be valid.
• If one firm can make positive profits, other firms with the same technology may also do it. This will push down the price of output and lower the profits of all firms