representative firm

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A single firm whose choices are representative of its industry. Assume all the firms in an industry have the same constant returns to scale technology and every firm acts as a price-taker. In equilibrium each firm must make zero profit and hence is indifferent to the level of output it produces. In contrast, the optimal capital–labour ratio is uniquely defined. The industry can therefore be modelled by a representative firm that has the same technology, chooses the same capital–output ratio, and produces the same output as the entire industry.

Subjects: Economics.

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