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ECON-2110 Lecture Notes - Lecture 11: Profit Maximization, Marginal Revenue, Average Variable Cost

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School
Clemson University
Department
Economics
Course
ECON-2110
Professor
Steven Johnson

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Document Summary

Chapter 11 costs and profit maximization under competition. Two extremes of competition: perfectly competitive market and monopoly. Three questions as a producer what price to set, what quantity to produce, and when to enter and exit the industry. Most firms don"t look like this but some markets follow this behavior. Competitive markets cannot influence or change market price. Is a competitive market if: production is similar among sellers, there are many buyers and sellers, many potential sellers could join the market. Demand becomes more elastic in the long run. Accounting profit = total revenue explicit costs. Economic profit = total revenue (explicit costs + implicit costs) Fixed costs don"t vary with output while variable costs do. Basing maximizing profit on mr and mc. Marginal revenue should be greater than marginal cost for a firm to continue production. Last unit produced should be where mr = mc profit maximization.

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Related Questions

1. Markets and competition In a perfectly competitive market, all producers sell (perfectly identical/different) goods or services. Additionally, there are (few,many) buyers and sellers. Because of these two characteristics, both buyers and sellers in perfectly competitive markets are price (takers,makers)

True or False: The market for lettuce does not exhibit the two primary characteristics that define perfectly competitive markets.

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B. If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.

1. Characteristics of competitive markets

The model of competitive markets relies on these three core assumptions:

1. There must be many buyers and sellers a few players can't dominate the market.
2. Firms must produce identical products buyers must regard all sellers' products as equivalent.
3. Firms and resources must be fully mobile, allowing free entry into and exit from the industry.

The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

Scenario

Competitive?
The government has granted the U.S. Postal Service the exclusive right to deliver mail. ________________
Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some makers use higher-quality cotton than others, which is reflected in the apparel's prices.  
Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take if they decide it's worth taking a taxi, they flag down the nearest one. _________________
There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants nationwide. The restaurant owners buy from the cheapest pasta producer available to