ECON-2110 Lecture Notes - Lecture 1: The Big Questions, Profit Maximization, Marginal Cost

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goldgerbil175

25 Oct 2016

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Chapter 11 - profits, prices and costs under competition. Profit is the main motivation for firms" actions. Some firms have more control over prices than others. There are many buyers and sellers, each small relative to the total market. Competitive firms have no price control: the market determines each firm"s price. Firms look for ways to maximize profit. Profit = pi = total revenue - total cost. Total revenue = price x quantity (p x q) Fixed costs are costs that do not vary with output. Variable costs are costs that do vary with output. Total cost = fixed costs + variable costs. Since a firm in a competitive market must sell its output at the market price, profit maximization depends only on the firm"s output decision. Each time the firm produces another unit there are extra costs and extra revenues. Profit maximization is about comparing the extra revenues to the extra costs at the margin.

Related Questions

There are two firms in the industry. Let q1 and q2 be the two firms in an industry and Q= q1 + q2 be the total output. The inverse demand in the industry if P (Q)= 45 - Q. The cost function for each firm is C(qi) = 9qi.

Assume oligopolistic competition between the two firms is Bertrand. Which of the following options are true?

A. Each firm tries to maximize its profit while choosing its output while taking its rival's output choice as given.

B. Both of the above are true.

C. Each firm tries to maximize its profit while choosing its price while taking its rival's price to be given.

D. None of the above is true.

The equilibrium prices and output of Firm 1 and Firm 2, assuming that the consumers will split evenly between the two firms if the firms offer the same price, are :

A. 6,18

B. 9, 15

C. 9, 18

D. 4,5

Each firm's profit level is:

A. 9

B. 5

C. 0

D. 36

The consumer surplus is given by:

A. 0

B. 856

C. 36

D. 648

The market outcome under Bertrand competition is:

A. Perfectly identical to the competitive market outcome.

B. The equilibrium price is more but the equilibrium quantity is less than the competitive market.

C. The equilibrium price is less but the equilibrium quantity is more than the competitive market.

D. The equilibrium price and quantity are less than the competitive market equilibrium price and quantity.

Please Explain Answers

beigekoala601

13. If a monopolistic competitor is producing an output for which marginal revenue is $40 and the marginal cost is $32, to maximize profits the firm should
A. decrease the level of output.
B. keep the level of output constant.
C. continue to make $8 per unit.
D. increase the level of output.

14. A monopolistic competitor will not make an economic profit unless
A. it engages in price discrimination.
B. its marginal revenue is greater than its marginal cost.
C. it faces an inelastic demand curve.
D. its price is greater than its average total cost.

15. The definition of monopolistic competition includes
A. few firms and ease of entry and exit.
B. few firms and barriers to entry and exit.
C. many firms and barriers to entry and exit.
D. many firms and ease of entry and exit.

16. Characteristics of monopolistic competition include all of the following except
A. significant barriers to entry.
B. a relatively large number of sellers and buyers.
C. small market share for each seller.
D. differentiated products.

olivecricket650

1. Which of the following statements about oligopolies is not correct?

a.		Oligopolistic firms always charge the monopoly price.
b.		Oligopolistic firms are interdependent in a way that firms in perfect competition are not.
c.		An oligopolistic market has only a few sellers.
d.		The actions of any one seller can have a large impact on the profits of all other sellers.

2. Which is true of an oligopoly market that reaches a Nash equilibrium?

a.		The firms will not have behaved as profit maximizers.
b.		A firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
c.		A firm will not take into account the strategies of competing firms.
d.		The market price will be different for each firm.

3. In game theory, what is a dominant strategy?

a.		the best strategy for a player to follow, regardless of the what strategies other players use
b.		a strategy that makes every player better off
c.		a strategy that must appear in every game
d.		the best strategy for a player to follow only if other players are cooperative

4. Which of the following situations produces the largest profits for oligopolists?

a.		The firms reach a Nash equilibrium.
b.		The firms combine to produce the monopoly output level.
c.		The firms set prices equal to marginal cost.
d.		The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.

ECON-2110 Lecture Notes - Lecture 1: The Big Questions, Profit Maximization, Marginal Cost

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