ECO-2023 Chapter Notes - Chapter 9: Average Variable Cost, Market Power, Marginal Revenue

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burgundybat929

5 Dec 2016

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In a price-taker market, the firms all produce identical products and each seller is small relative to the total market. The output of any single firm has no effect on the market place. Each firm can sell all its output at the market price but cannot sell any of its output at a higher price. To maximize their profits, they must not only decide how much to produce but also what price to charge. What are the characteristics of price-taker markets: the firms in a market will be price takers when the following four conditions are met: All the firms in the market are producing an identical product. A large number of firms exist in the market. Each firm supplies only a very small portion of the total amount supplied to the market. The profit of the price taker is maximized at the output rate at which p=mr=mc.

Related Questions

1. A firm that is a pure competitor has P > ATC and P > MC on the output (Q) it is presently producing and selling. Is this firm maximizing its profits? If not, which direction should it change its output if it wants to maximize its total profit?

2. Is a pure competitor in short-run or long-run equilibrium if it has P=MC=ATC? Explain.

3. There is free entry in the model of pure competition. Assuming that P > ATC for a vast number of firms producing a standardized product for a given market, what will happen to market supply as the consequence? What will happen to the market price (P) of the product these firms are producing?

4. Firms in the pure competition have horizontal demand functions. (The market determines product price, so firms in this competitive market are price takers.) Do firms in this model have to lower prices if they want to sell more output? Why or why not?

copperporcupine291

NUMBER 1.

a. A firm is currently producing 40 units of output. At this level of ouput produced:

. Its average total cost is 130 (ATC = 130)

. The price per unit of output is 150

. MR = 30

. MC = 50

i. Is this firm making profits or losses? How much?

ii. Are they mÃ¡ximum profits? Why?

iii. If your answer to part ii. was no, what does this firm have to do to maximize its profits?

NUMBER 2.

A firmâs total cost and marginal cost functions are

TC = 10 Q² + 2 Q â 2 ; MC = 20 Q + 2.

Asuming that the market price is 42 and that the marginal revenue (MR) is also 42 (it is constant at all output levels), how much output will this firm sell (produce) to maximize profits?

1. Suppose that two identical firms produce widgets and they are the only firms in the market. The cost functions of the two firms are given by C1(Q1) = 60Q1 and C2(Q2) = 60Q2. The demand function of the market is given by the function P = 300 - Q where Q=Q1+Q2.

a. Find the Cournot equilibrium output levels and profit for each firm.

b. Suppose the two firms form a Cartel and to maximize joint profit. Calculate how many widgets each firm will produce and their output levels.

c. Suppose firm 1 is the only firm in the market. Determine the output and price that firm 1 will produce and charge. Also, determine the profit level.

d. Suppose firm 2 takes its output decision after firm1 has announced its output decision. Calculate the output levels and profit levels of the two firms. Comparing the output and profit of part (a), which firm is better off and which firm is worse off ? Explain your answer.