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How do I recover the cost function from the profit function?

Suppose I have $$ \pi(p, w_1, w_2) = p^3 \cdot w_1 \cdot w_2 $$.

How do I get the cost function?

Using Hotelling's lemma I get the supply function: $$ y_s(p) = \frac{\partial \pi(p, w_1, w_2)}{\partial p} = 3 p^2 \cdot w_1 \cdot w_2$$ and the input demands: $$z_1(p, w)= - \frac{\partial \pi(p, w_1, w_2)}{\partial w_l} = - p^3 w_2 $$ and $$z_2(p, w)= - \frac{\partial \pi(p, w_1, w_2)}{\partial w_2} = - p^3 w_1 $$but what is the next step?

Note that the functional forms are hypothetical and highly probable to be invalid.

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I suggest that you ask yourself the following questions:

  • If $\tilde{z}(y;w)$ is the input demand from cost minimization, can there be any difference between $\tilde{z}\big(y(p);w\big) \equiv \hat{z} (p;w)$ and $z(p;w)$ from Hotelling's lemma and profit maximization?
  • Even if $\tilde{z}(y;w)$ is a correspondance rather than a function, is there any difference between $ p \hat{z} (p;w) = p \tilde{z}\big(y(p);w\big) = c(y;w) $ and $p z(p;w)$ (where the later are dot products).

Hope this helps,

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If you know quantity as a function of prices, then you know revenue as a function of prices. If you also know profits, then cost are straightforwardly the difference.

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  • $\begingroup$ It would help if you elaborated a little (and addressed the specific question mentioned in the original post). $\endgroup$ – Steve S Dec 2 '14 at 1:35

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