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Christian Campbell

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Lecture 10 t November 17, 2010
Individual opt. => demand function
Supply side: utility
Firm Production function
Expresses relationship b/w inputs & outputs
Y = F(X1, X2, X3, X4UY X1, X2, X3 Y]vPo}µ]oUvPÇUX
Organization of Firm
1- Proprietorship: single person firm
2- Partnership
3- Publically-owned
- Separation of ownership and management
EX1: One-person firm
S: service this person provides Y
e: effort Y1 income = e1 Y1=e1
S = f(e) = r slope = MRS
Ps {s = revenue = income = 1
Assume Ps= 1 e
U(e, Y) e* = es
!ØOr !Î
Want to max U(e, Y) s.t. Y1=e1
EX2: Partnershipv2 individuals exactly alike (assumption)
Ö Preference, technology exactly alike
e1 + e2 = y1 + y2
assume equal partners, each entitled ½ of income generated by the partnership
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Lecture 10 t November 17, 2010
1. e2 = e* Y1 Y1 = e1
Y1 = ½ (e1 + e*)
MRS =1 Y1 = ½(e1+e*)
Max U(e1, Y1) s. t. Y1 = ½(e1+e*)
MRS = ½ e*/2
ep e* e1
2. Y1 = ½(e1+e2) e1 = e2 = e
Y1 =e1
Team work
Technology before : e1 + e2 = y1 + y2 ep eS e1
w/ team work
technology : Y = Y1 + Y2 = t(e1 + e2) t>1
Max U(e1, Y1) s. t. Y = t(e1+e*)/2
Y1 Y1 = t1
Y1 =e1
If t]Z]PZv}µPZUZ]v]À]µo
Can provide less effort but enjoy
Higher income
eP es e1
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