Competitive markets are socially desirable because welfare, defined as consumer surplus plus profits, is maximized. We start by considering the outcome if all markets are competitive. Production processes: We consider a fixed-proportions production function and a variable-proportions production function, both of which have two properties: (1) constant returns to scale, and (2) 1 unit of E and 1 unit of L produces 1 unit of Q.Input costs: The marginal cost of the two inputs, E and L, are m = w = 1.Demand: The final goods market has a linear inverse demand curve of.This difference between fixed proportions and variable proportions can be illustrated using an example with the following properties: With a fixed-proportions production process, vertical integration cannot increase profits, whereas with variable proportions profits can rise. Variable Proportions Note: Due to its size, the table will open in a new browser window. : Ĭhapter 12: Vertical Integration and Vertical Restrictionsįixed vs.
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