ECON 2020 Lecture Notes - Lecture 20: Decision Rule, Sunk Costs, Market Power

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cerisegiraffe538

27 Aug 2018

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Econ2020 lecture 20 notes chapter 14: firms in competitive markets. Keep in mind: maximizing profit = any firm"s goal. Characteristics of perfect competition / competitive market: many buyers and many sellers, the good offered for sale are identically/largely the same, firms can freely enter or exit the market. Each buyer and seller is a price taker (takes the given price) Total revenue (tr): price of the product the firm is selling. Average revenue (ar): revenue per unit / whatever the price is. Marginal revenue (mr): the change in tr from selling one more unit. Price is only equal to mr in a competitive market!!!! Price is always the same in a competitive market because buyers and sellers are price takers. What quantity maximizes the firm"s profit? (think at the margin) If you increase q by one unity, revenue rises by mr, cost rises by mc. This firm should stop producing at 4 units and no less than two units to.

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

Firm A and Firm B are two of the largest producers of a special pool-cleaning robot. Suppose that the marginal cost of making such a robot is constant at $1,500 per unit and there is no start-up cost. The demand for the robot is described by the following table.

Price	Quantity	TR	MR	MC	TC	Profit
$8,500	5,500
7,500	6,500
6,500	7,500
5,500	8,500
4,500	9,500
3,500	10,500
2,500	11,500
1,500	12,500

a) Complete the columns for total revenue, marginal revenue, marginal cost, total cost, and profit in the table above.

b) If the market for the robots were perfectly competitive, what would the price and quantity be?

c) If there were only one supplier of robots (i.e., a monopoly), what would the price and quantity be?

d) If the two firms formed a cartel, what would be the price and quantity? If the two firms split the market evenly, what would Firm A

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ECON 2020 Lecture Notes - Lecture 20: Decision Rule, Sunk Costs, Market Power

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