Econ 2010A Sahil Chinoy October 1, 2019

Production
∗
• The profit maximization problem is maxz {pf (z) − w · z}, which yields the first-order conditions p ∂f∂z
(z
i
)
= wi ,
or that the marginal revenue equals the factor price.
– The zero-profit condition gives pf (z ∗ ) − w · z ∗ = 0.
P ∂f 1
∗ If f (αz) = αn f (z), then ∂zi = nf (z), so π = pf (z) − w · z = ( n − 1)w · z, which means the
zero-profit condition only holds when n = 1 (constant returns to scale). For decreasing returns to
scale (n < 1), we have positive profits.
– Yields an input demand function z(p, w), a supply function y(p, w) = f (z(p, w)), and a profit function
π(p, w) = pf (z(p, w)) − w · z(p, w). These satisfy:
∗ z(p, w) and y(p, w) are homogenous of degree zero.
∗ π(p, w) is homogenous of degree one.
∗ π(p, w) is convex.
∗ If f (z) is a strictly concave function, then z(p, w) and f (z(p, w)) are single-valued. Intuitively, if two
options are equally good, then the intermediate option is even better and hence the two options can’t
be optimal.
dπ dπ
∗ Hotelling’s Lemma: dp = y and dwi = −zi . These just come from using the envelope theorem on
the profit function.
• The cost minimization problem is to minimize w · z subject to f (z) ≥ q, or minz {w · z + λ(q − f (z))}, which
yields the first-order conditions wi = λ ∂f∂z(z)
i
.
– The input demand that satisfies cost minimization is denoted z(w, q) and the cost function is c(w, q) =
w · z(w, q). These satisfy:
∗ c(·) is homogenous of degree one in w.
∗ c(·) is nondecreasing in q.1
∗ c(·) is a concave function of w.
∗ z(·) is homogenous of degree zero in w.
∂c
∗ Shepard’s Lemma: ∂wi = zi . This comes directly from the envelope theorem.
∗ If f (·) is homogenous of degree one, then z(·) and c(·) are homogenous of degree one in q.
∗ If f (·) is concave, then c(·) is a convex function of q.

1 Apparently this follows from free disposal, but I don’t fully understand this.