ECON 201 Lecture Notes - Lecture 9: Perfect Competition, Marginal Revenue, Profit Maximization

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5 Dec 2018

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Properties: identical products (exactly same, free entry and exit of firms this is critical, many buyers and sellers, have full information, no one participant can influence the market. Profit maximization is the goal of competitive suppliers they seek to maximize the difference between revenues and cost. The shut-down price corresponds to the minimum value of the avc curve. The break-even price corresponds to the minimum of the atc curve. The firm"s short-run supply curve is that portion of the mc curve above the minimum of the avc. Short-run equilibrium in perfect competition occurs when each firm maximizes profit by producing a quantity where. P=mc, provided the price exceeds the minimum of the average variable cost. Industry dynamics: entry and exit of firms: normal profits, reflect the opportunity cost of production, firms do not operate in the long run if they cannot make normal profits, supernormal/economic profits, profits above normal profits that induce firms to enter an industry.

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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?

What conditions make a market perfectly competitive? A market is perfectly competitive if:

(i) it has many buyers and one firm, which produces a product with no close substitutes, with barriers to new firms entering the market.

(ii) it has many buyers and many sellers, all of whom are selling differentiated products, with no barriers to new firms entering the market.

(iii) it has many buyers and a few sellers, all of whom are selling identical products, with no barriers to new firms entering the market.

(iv) it has many buyers and a few sellers, all of whom are selling differentiated products, with barriers to new firms entering the market.

(v) it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.

ambertiger96

32. Which of the following is not a difference between monopolies and perfectly competitive markets?

A. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves.

B. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost.

C. Monopolies can earn profits in the long run while perfectly competitive firms break even.

D. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not.

40. Which of the following statements is not correct?

A. Both monopolies and monopolistically competitive firms can earn economic profits in the long run.

B. Both monopolistically competitive and perfectly competitive firms can earn economic profits in the short run.

C. Only competitive firms produce the welfare-maximizing level of output.

D. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.

43. A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that

A. the profits of the firm are negative.

B. firms are likely to leave this market in the long run.

C. the firm is currently maximizing its profit.

D. All of the above are correct.

ECON 201 Lecture Notes - Lecture 9: Perfect Competition, Marginal Revenue, Profit Maximization

ECON 201 Full Course Notes

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