the profit function is convex in prices and wages (output and input prices respectively). How does this interact with profit maximization since convexity implies tangents always lie below the curve I would have thought convexity would be necessary for minimization rather than maximization.
It is true that we are usually interested in minimizing convex functions or maximizing concave functions, typically over convex sets. But I think you have two confusions:
- The profit function is the result of a profit maximization problem. Not the objective function in the maximization problem. A profit function $\pi^*(p, w, r)$ identifies maximum profit given the price levels (p, w, r).
- In the profit maximization problem, the objective function $\pi = pf(k, l) - wl - kr$ is concave in $k$ and $l$, the choice variables of the maximization problem.
$\begingroup$ May I ask what is the convex sets you are referring to in the first sentence? Is it the production set? $\endgroup$– AqqqqOct 25, 2019 at 16:21
$\begingroup$ @Aqqqq, "convex sets" in my answer refers to the choice set of a maximization or minimization problem. In the profit maximization problem, the choice set is labor >=0, and capital >=0, which is the first quadrant of a 2-D plane, a convex set. $\endgroup$– PaulOct 26, 2019 at 21:25
Profit functions are convex in output price that is : π (tp + (1- t)p′) ≤ tπ(p) + (1- t)π(p′) Intuitively this implies that if price of output increases by one unite the profit will rise by exactly or more than one unite.