ECON 101 Lecture Notes - Lecture 14: Marginal Revenue, Marginal Cost, Perfect Competition

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Marginal cost: the additional cost incurred by producing an additional unit of output. Marginal revenue: change in total revenue (tr) generated by selling an additional unit of output. Shutdown decision > should the firm operate at all: if tr > tc, the rm is pro table, if tr = tc, the rm breaks even, if tr < tc, the rm incurs a loss. Firm should shutdown if: long-run: tr < tc, shutdown and exit the industry, short-run: tr < vc. Perfect competition: price takers: takes market price as given. The price-taking firm"s pro t-maximizing quantity of output: the pro t-maximizing point is where mc crosses the mr curve (horizontal line at the market price) Perfectly competitive markets in the short-run: production decision, produce quantity where price (mr) = marginal cost (mc, pro t maximizing condition for a perfectly competitive rm: p = mc.

Related Questions

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

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?

Question:

Evaluate the following statement:

In the short-run, information about a perfectly competitive firm's fixed costs is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Answer:

The profit-maximizing level of output in a perfectly competitive market is determined at the level where marginal revenue (MR) equals marginal cost (MC). Marginal revenue is the additional revenue earned by selling an additional unit of output, while marginal cost is the additional cost of producing an additional unit of output (Farnham, 2014). Additionally, in order to find the amount of profit earned, we need to know the total cost and total revenue amounts. Total cost is the total of variable and fixed cost. Therefore, in short-run production, a firm's fixed cost is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Farnham, P (2014) Economics for Managers 3^rd edition

~Beth

I need a peer reply for this, please.

plumhornet520

ECON 101 Lecture Notes - Lecture 14: Marginal Revenue, Marginal Cost, Perfect Competition

ECON 101 Full Course Notes

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