<p>If the firm takes output price and wage as given, then its supply is infinity if the price is larger than the wage, and it is zero if the price is equal, or lower, than the wage. If the price is larger than the wage, the firm by increasing output can make arbitrarily large profits, and thereby, in particular, cover its fixed cost. If the price is equal or below the wage, then there is no way of making profits, and therefore, the unique best option is to set output equal to zero.</p>

CC BY-SA 4.0
2018-08-09T16:39:21.947Z
Yet consumers would be willing to pay any price to get more than 0 units of $y$, so this cannot be the equilibrium.
Giskard
CC BY-SA 4.0
2018-08-10T17:07:39.237Z
Very good observation. My answer only described the supply function. It did not describe what would be equilibrium. In this example, in fact, no perfectly competitive equilibrium exists, that is, supply and demand functions do not intersect. Very mathematically speaking, one can say that in the example the convexity condition for production technologies, that is typically assumed when the existence of equilibrium is proved, is violated. In this sense, the non-existence of equilibrium is "due" to the non-convexity.
Tilman Borgers
CC BY-SA 4.0
2018-08-10T18:47:18.493Z
Edit this into your answer?
Giskard
CC BY-SA 4.0
2018-08-09T16:16:40.283Z
2018-08-09T16:16:40.283Z
Tilman Borgers
<p>I don't think I understand how optimization problems with a linear function work as of now. If you have a production economy with two agents, two goods and Cobb-Douglas utility representation, and you introduce a firm with a linear production function and fixed costs that basically acts as a transfer from one good (say x), to the other good (say y), as far as I can see, the solution to the firm's maximization is to shut down.</p>

<p>This is what I am talking about specifically:</p>

<p>$$
u_1(x,y)=\alpha\ ln(x)+(1-\alpha)ln(y)
$$
$$
u_2(x,y)=\beta\ ln(x)+(1-\beta)ln(y)
$$
$e_1=(0,1), e_2=(1,0)$
with a linear production function for firm $f(x)=x$ where they use x as an input and produce y, and there is a fixed cost FC>0 only if they produce. My problem lies in how do I solve the firm's maximization problem? It's linear, so I don't think I can use the FOC like you can with the utility maximization problem. Intuitively, I "feel" like it's going to be a corner solution, but I don't know how to systematically solve optimization problems with a linear function.</p>

CC BY-SA 4.0
2018-08-08T19:51:59.737Z
The production function you give, $f(x)=x$, is confusing: there is no output $y$ and there is no fixed cost.
Herr K.
<production-function><optimization>
General Equilibrium with Linear Production
soccer_stats
# General Equilibrium with Linear Production

(Asked by: username_0 on 2018-08-08)

I don't think I understand how optimization problems with a linear function work as of now. If you have a production economy with two agents, two goods and Cobb-Douglas utility representation, and you introduce a firm with a linear production function and fixed costs that basically acts as a transfer from one good (say x), to the other good (say y), as far as I can see, the solution to the firm's maximization is to shut down.

This is what I am talking about specifically:

$$
u\_1(x,y)=\alpha\ ln(x)+(1-\alpha)ln(y)
$$
$$
u\_2(x,y)=\beta\ ln(x)+(1-\beta)ln(y)
$$
$e\_1=(0,1), e\_2=(1,0)$
with a linear production function for firm $f(x)=x$ where they use x as an input and produce y, and there is a fixed cost FC>0 only if they produce. My problem lies in how do I solve the firm's maximization problem? It's linear, so I don't think I can use the FOC like you can with the utility maximization problem. Intuitively, I "feel" like it's going to be a corner solution, but I don't know how to systematically solve optimization problems with a linear function.

**Tags:** production-function, optimization
> **Comments:**
> **username_1**: The production function you give, $f(x)=x$, is confusing: there is no output $y$ and there is no fixed cost.  

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## 1 answers

### Answer by username_2 on 2018-08-09. Score: 1 | Accepted answer

If the firm takes output price and wage as given, then its supply is infinity if the price is larger than the wage, and it is zero if the price is equal, or lower, than the wage. If the price is larger than the wage, the firm by increasing output can make arbitrarily large profits, and thereby, in particular, cover its fixed cost. If the price is equal or below the wage, then there is no way of making profits, and therefore, the unique best option is to set output equal to zero.

> **Comments:**
> **username_3**: Yet consumers would be willing to pay any price to get more than 0 units of $y$, so this cannot be the equilibrium.  
> **username_2**: Very good observation. My answer only described the supply function. It did not describe what would be equilibrium. In this example, in fact, no perfectly competitive equilibrium exists, that is, supply and demand functions do not intersect. Very mathematically speaking, one can say that in the example the convexity condition for production technologies, that is typically assumed when the existence of equilibrium is proved, is violated. In this sense, the non-existence of equilibrium is "due" to the non-convexity.  
> **username_3**: Edit this into your answer?  

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