SHORT RUN PROFIT MAXIMIZATION IN
A CONVEX ANALYSIS FRAMEWORK

Ilko Vranki? and Mira Krpan

University of Zagreb - Faculty of Economics and Business
Zagreb, Croatia

INDECS 15(1), 1-15, 2017
DOI 10.7906/indecs.15.1.1
Full text available here.
 

Received: 1 November 2016
Accepted: 21 February 2017
Regular article

ABSTRACT

In this article we analyse the short run profit maximization problem in a convex analysis framework. The goal is to apply the results of convex analysis due to unique structure of microeconomic phenomena on the known short run profit maximization problem where the results from convex analysis are deductively applied. In the primal optimization model the technology in the short run is represented by the short run production function and the normalized profit function, which expresses profit in the output units, is derived. In this approach the choice variable is the labour quantity. Alternatively, technology is represented by the real variable cost function, where costs are expressed in the labour units, and the normalized profit function is derived, this time expressing profit in the labour units. The choice variable in this approach is the quantity of production. The emphasis in these two perspectives of the primal approach is given to the first order necessary conditions of both models which are the consequence of enveloping the closed convex set describing technology with its tangents. The dual model includes starting from the normalized profit function and recovering the production function, and alternatively the real variable cost function. In the first perspective of the dual approach the choice variable is the real wage, and in the second it is the real product price expressed in the labour units. It is shown that the change of variables into parameters and parameters into variables leads to both optimization models which give the same system of labour demand and product supply functions and their inverses. By deductively applying the results of convex analysis the comparative statics results are derived describing the firm's behaviour in the short run.

KEY WORDS

short run profit maximization, duality, normalized profit function, Hotelling's lemma and its dual, comparative static analysis

CLASSIFICATION

JEL:D01, D21


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