ECON-221 Lecture Notes - Lecture 29: Marginal Revenue, Perfect Competition, Natural Monopoly

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coppermule660

11 Sep 2020

School

Diablo Valley College

Department

Economics

Course

ECON-221

Professor

yoon

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Document Summary

To maximize profits, the firm should use a marginal analysis. Profit is maximized by choosing the level of output such that. The firm can increase profits by producing more q. The firm has produced too much q and the profits are not maximized. Price taker: cannot set his own price, and must change the price that is predetermined by overall supply and demand. Recall: cost curves (atc, avc, and mc) are u-shaped, in perfect competition, p= mr, profits are maximized at the level of output q where mr= mc. = q x ( p atc) Intuition : profit = (units sold) x ( average profit per unit) Monopoloy: single seller who produces a good. How do monopolies persist: recall what happens in competitive markets with free entity. Barriers to entry: resistrictions that mmake it difficult for new firms to enter a market, allows many monopolists to enjoy long run economic 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?

A small firm faces an inverse demand function of P = 100 - Q. Its total cost function is given by TC = .5Q2. (You should see right away that marginal revenue is thus MR = 100 - 2Q, and it also happens that marginal cost is just MC = Q. Both MR and MC are the first derivatives of total revenue and total cost. And a quick comment on MC: unlike some marginal cost functions we've seen, this one is not constant, because marginal cost is getting $1 higher with each additional unit of output.)

The Chief Executive Officer will manage the firm, choosing output and price. Currently, the CEO is negotiating an incentive-based contract with the shareholders of the company.
(Hint: basing compensation on revenue will motivate revenue maximization rather than profit maximization!)

Hint: since the plan creates incentives for the CEO to maximize revenue rather than profit, you should not set MR = MC at this point. BIG hint: revenue is maximized when selling an additional unit won't increase your revenue, or in math terms, when MR = 0.)

Owners' proposal: CEO keeps 10% of TR.

Firm price:
Firm output:
Total revenue:
Firm profit:
CEO compensation:
Remaining profit for owners:

redfrog477

NUMBER 3.

You have the follwoing information for a firm:

TR = 200 Q â Q² MR = 200 â 2 Q

TC = 1000 - 8 Q + Q² MC = - 8 + 2 Q

a. If the firm produces 60 units of output, what are profits or losses for this firm.

b. Is the firm maximizing profits producing Q = 60? If not, what is the profit maximizing

level of output produced?

c. What are maximum profits?

NUMBER 4.

A firm is currently producing 80 units of output. At this level of output produced, P = 150 and ATC = 120. Also asume that MC = 130 and MR is constant at all output levels and equal to 150.

a. Is this firm making profits? If so, what are these profits?

b. Is this firm maximizing profits? If not, what would you recommend this firm do to

maximize profits? Why?

ECON-221 Lecture Notes - Lecture 29: Marginal Revenue, Perfect Competition, Natural Monopoly

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