the revenue constraint for enterprise k can be represented by:
p1yk + ∙ ∙ ∙ + pMyM ≥ RC,
(6)
(7)
while the employment constraint for enterprise k can be represented by:
xv1 ≥ Nk
where we let input xv1 denote labor.
To get the loss in profits from the expenditure, revenue (output), and employment con-
straints, we calculate profits with the constraints (5) — (7). The superscript k will be dropped
because the variable inputs xv and the outputs y are choice variables. In practice, Ek , Rck ,
and Nk are computed as observed expenditures on variable inputs, output revenues, and
IM
employed workers, i.e., wvi xvki is used as a proxy for Ek , pmymk is used as a proxy for
i=1 m=1
Rck and xvk1 is used as a proxy for Nk .
Given output and input prices, the fixed factor endowment xfk , and technology (4), the
unrestricted short-run profit maximization problem for the kth enterprise can be calculated
as the solution to the following linear programming problem:
πuk
=max
ym ,xvi ,z
pmym
m=1
wvixvi
i=1
(8)
K
s.t. zkymk
k=1
K
zkxvki
k=1
K
zkxfki
k=1
zk
≥ ym, m=1, ..., M
≤ xvi ,i= 1, ..., I
≤ xk ,i= I +1, ..., N
fi
=1,z∈ R+K
k=1
where the four constraints in (LP.1) represent the technology with I variable inputs, N - I
fixed inputs and M outputs. The expenditure, revenue, and employment constraints are
represented by expressions (5) — (7) respectively.
12
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