ECO101H1 Lecture Notes - Lecture 15: Perfect Competition, Market Price, Longrun

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Mr = mc q* is profit-maximizing level of output: is firm earning economic profits, add atc schedule compare p to atc. If commodity is not infinitely divisible, there are two levels of output - before mr = mc and after mr = Tr / q > tc / q p > atc. Tr / q < tc / q p < atc profits break even loss. Profit: (p - atc) x q = (25 - 20) x 10 = 50. Economic profit: (p - atc) x q = (25 - 30) x 10 = -50. Market ss = sum of firms" ss = sum of firms" mc. The market for hot dogs is perfectly competitive, and the typical hotdog stand is earning economic profits. Economic profits new firms enter ss shifts to right market price falls. When economic profits are zero and there is no incentive for firms to enter (or leave) the industry.

Related Questions

NUMBER 3.

You have the follwoing information for a firm:

TR = 200 Q â Q² MR = 200 â 2 Q

TC = 1000 - 8 Q + Q² MC = - 8 + 2 Q

a. If the firm produces 60 units of output, what are profits or losses for this firm.

b. Is the firm maximizing profits producing Q = 60? If not, what is the profit maximizing

level of output produced?

c. What are maximum profits?

NUMBER 4.

A firm is currently producing 80 units of output. At this level of output produced, P = 150 and ATC = 120. Also asume that MC = 130 and MR is constant at all output levels and equal to 150.

a. Is this firm making profits? If so, what are these profits?

b. Is this firm maximizing profits? If not, what would you recommend this firm do to

maximize profits? Why?

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?

The cost and revenue structures for the only producer of X, Inc., are shown in this table.

Quantity	TVC	TC	TFC	ATC	MC	Price	TR	MR
0	0	15		----	----	20	0	----
1	11				11	17.5
2		32					30
3		36.6				13.5
4	25						48
5		44.5				10.5
6	36					9
7	45.2					8

a. Using the formulas that you are familiar with complete the cost and revenue structure in the table.

b. What are the firm's fixed costs? ______

c. What is the firm's s profit maximizing position? P = _____, Q = _____.

d. At each price level is the demand for product X elastic or inelastic? How do you know?

e. What is the profit or loss at the equilibrium position?

f. Is this firm producing at the lowest possible ATC? At what output level is the minimum point on the ATC?

g. Why is the firm not producing at the cheapest output level?

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ECO101H1 Lecture Notes - Lecture 15: Perfect Competition, Market Price, Longrun

ECO101H1 Full Course Notes

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