EC120 Lecture Notes - Lecture 15: Sunk Costs, Market Power, Marginal Revenue

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3 Nov 2016

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Scenario: three years after you graduate, you run your own business. You must decide how much you produce, what price to charge, how many workers to hire, etc. Assumption: there are many buyers and many sellers, the goods sold is largely the same, firms are free to enter and exit. Because of 1 and 2, each buyer and seller is a price taker (the have no control over price) Average revenue (ar) ar=tr/q = (pxq)/q= p. Marginal revenue(mr) mr = change and tr/change and q. A competitive firm can keep increasing its output without affecting the market price. Each one unit increase and q causes revenue to rise by p is only true if the firm is in a competitive market. To find the answer, think at the margin . If the firm increase q by one unit: Rule: mr=mc at the profit maximizing level of output (q) at qa with mr>mc increasing q increases profit.

Related Questions

PROFIT MAXIMIZATION

Reminders:

Q: Quantity, TC: Total Costs, VC: Variable Costs, MC: Marginal Costs, MR: Marginal Revenue, TR: Total Revenue

1. Suppose the market for DVD movies is perfectly competitive. The industry price for the movies is $24, and a typical firm has the following total cost data:

Q	TC	VC	MC	MR	TR	Net Profit
0	10
1	33
2	53
3	70
4	90
5	114
6	143

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

2. Now suppose that some firms have been able to differentiate their DVDs, and the market has become monopolistically competitive. A typical firm now has the following demand schedule and total cost data:

Q	P	TC	VC	MC	MR	TR	Net Profit
0	40	8
1	35	20
2	30	28
3	25	40
4	20	56
5	15	76
6	10	100

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

The average revenue (demand) for product Q is given by AR = 50 - Q and the total cost of Q by:

STC = 100-4Q+2Q^2

a. Find the price function and then the TR function. See Assignment 3 or 4 for an example. Hint: another name for price is average revenue (AR).

b. Write the MR and MC functions below. Remember: MR = dTR/dQ and MC = dSTC/dQ. See Assignment 5 for a review of derivatives.

c. What positive value of Q will maximize total profit? Remember, letting MR = MC signals the objective of total profit maximization. Solve MR = MC for Q. The value of Q you get should not be zero or negative.

d. Use the price function found in (a) to determine the price per unit that will need to be charged at the Q found in (c). This will be the price you should ask for the total profit maximizing quantity.

e. What total profit will result from selling the quantity found in (c) at the price found in (d)? Hint: the profit function is found as TR â STC.

orangemole416

Consider a monopolistically competitive market with N firms.

Each firm's business opportunities are described by the following

equations:

Demand: Q=100/N-P

Marginal Revenue: MR=100/N-2Q

Total cost: TC=50+Q(squared)

Marginal Cost: MC=2Q

a. How does N, the number of firms in the market, affect each firms

demand curve? Why.

b. How many units does each firm produce? (The answer to this and

the next two questions depend on N.)

c. What price does each firm charge?

d. How much profit does each firm make?

e. In the long run, how many firms will exist in this market?

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EC120 Lecture Notes - Lecture 15: Sunk Costs, Market Power, Marginal Revenue

EC120 Full Course Notes

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