Utility maximization and the theory of the firm
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1970
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Abstract
The fundamental assumptions that individuals attempt to maximize their utility within the confines of their budgets and that entrepreneurs and firms attempt to maximize profit have a deeply embedded place in the history of economic thought. While the first assumption has remained relatively unscathed the second assumption, that of profit maximization, has come under heavy criticism from several reputed writers. These writers question the efficacy of restricting the motivation for firm behavior to profit. While several authors have proposed more broadly based models of firm behavior it appears that the most of these have overlooked the fact that entrepreneurs are first and foremost individuals who are also attempting to maximize their own utilities. An attempt to correct this oversight and fill the resulting void in economic theory is the purpose of this dissertation. More specifically, this dissertation considers an individual who both owns and manages his own firm and whose income is derived from the profit of this firm. The analysis of his behavior in terms of the amount of labor he chooses to expend, the amounts of the various inputs he purchases, and the quantity of output he offers for sale are economic variables whose values this dissertation seeks to determine. This dissertation will also attempt to discover when a utility-maximizing owner-manager will simultaneously maximize the profit of his firm in a purely competitive environment.
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Economics