ECON 1P91 Lecture Notes - Lecture 5: Profit Maximization, Perfect Competition, Rational Ignorance

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ECON 1P91 Full Course Notes

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Social responsibility of a firm is to make profits. For a firm short run is the period of time in which you cannot alter factors of production (workers, machines, computers what goes in to making the product) Long run - the period of time after which you can alter all of the factors of production. In the long run under perfect competition profits are zero! Case 1 - if ar>ac, each firm is making positive profits - means other firms are attracted by this and enter the industry more competition between firms. Case 2 - if ar

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What are the characteristics of perfect competition? Why does this type of fast-food restaurant tend to display characteristics of perfect competition?

Imagine you are running a firm with the characteristics of a perfectly competitive firm. Describe how your firm would maximize its short-run profits.

Why might firms in perfect competition choose to be open on Monday, typically the slowest day of the week, when their revenues do not seem to be sufficient to warrant doing so?

What are the long-run benefits of running a firm in perfect competition?

Under what conditions would your value-menu fast-food restaurant decide to be open on Mondays, and when would it decide not to be open on Mondays? When is losing money on Mondays still a good business decision?

Explain how your experience as a manager would change if the value-menu fast-food restaurant you were in charge of operated under a different market structure?monopolistic competition, oligopoly, and monopoly. For example, in each case, how would you decide what price to charge? What would your profits look like? Would consumers be better off in terms of welfare, when you compare a firm in monopolistic competition, oligopoly, and monopoly to one in perfect competition?

Two sources in addition to your textbook are required for this paper.

write a two- to three-page paper (600 words minimum) examining perfect competition in the value-menu fast-food restaurant business. Address the following questions in your paper:
1. What are the characteristics of perfect competition? Why does this type of fast-food restaurant tend to display characteristics of perfect competition?
2. Imagine you are running a firm with the characteristics of a perfectly competitive firm. Describe how your firm would maximize its short-run profits.
3. Why might firms in perfect competition choose to be open on Monday, typically the slowest day of the week, when their revenues do not seem to be sufficient to warrant doing so?
4. What are the long-run benefits of running a firm in perfect competition?
5. Under what conditions would your value-menu fast-food restaurant decide to be open on Mondays, and when would it decide not to be open on Mondays? When is losing money on Mondays still a good business decision?
6. Explain how your experience as a manager would change if the value-menu fast-food restaurant you were in charge of operated under a different market structure?monopolistic competition, oligopoly, and monopoly. For example, in each case, how would you decide what price to charge? What would your profits look like? Would consumers be better off in terms of welfare, when you compare a firm in monopolistic competition, oligopoly, and monopoly to one in perfect competition?
Two sources in addition to your textbook are required for this paper.

Indicate wheather each of the following statements is true or false and explin why.

a) A competitive firm that incurring a loss should immediately cease operation.

b) A pure monopoly does not have to worry about suffering losses because it has the power to set it prices at any level it desires.

c) In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits.

d) Assuming a linear demand curve, a firm that wants to maximize its revenue will charge a lower price tahn a firm that wants to maximize its profits.

e) If P > AVC, a firm's total fixed cost will be greater than its loss.

f) When a firm is able to set its price, its price will always be less than its MR.

g) A monopoly will always earn economic profit because it is able to set any price that it wants to.

ECON 1P91 Lecture Notes - Lecture 5: Profit Maximization, Perfect Competition, Rational Ignorance

ECON 1P91 Full Course Notes

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