ECO 405 Lecture Notes - Lecture 11: Envelope Theorem
Document Summary
A firm"s economic profit can be expressed as a function of inputs p =pf(k,l)-c(l,k) = pf(k,l) - vk - wl. Only k, l, and q=f(k,l) are under firm"s control. Shows its maximal profits as a function of the prices that the firm faces. P v w max k l p k l max pf k l k l vk wl. The profit function is homogeneous of degree one in all prices: nondecreasing output price, p, nonincreasing in input prices, v, and w, convex in output prices. Side note: property 1 just says that profits will keep up with inflation. Ie if revenue and costs both double, profits will also double. If revenue doubles from 10,000 to 20,000 and costs double from 5,000 to 10,000 then profits will double from 5,000 to 10,000. To see how profits respond to changes in output and input prices.
