ECO101H1 Lecture Notes - Lecture 15: Perfect Competition, Market Price, Organic Food

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14 Dec 2015

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Profit-maximizing by a perfectly competitive firm in the short-run (fixed costs) Answer: produce q where mr (= p) = mc. Answer: if p < avc, shut down; otherwise, produce q. Mr = mc => q* is profit-maximizing level of output. To answer: add atc schedule compare p to atc. If commodity is infinitely divisible, there is a unique profit-maximizing level of output at mr = mc: graphs (implicit, calculus. Tr > tc => profits => tr / q > tc / q p > atc. Tr = tc => breakeven p = atc. Tr < tc => loss => tr / q < tc / q p < atc. Economic profit: (p - atc) * q = (25 - 20) * 10 = 50. Case 2: zero economic profit (p = atc) Economic profit: (p - atc) * q = (25 25) * 10 = 0.

Related Questions

6. Power Printers Total Costs (per hour)

q TC

0 65

1 80

2 95

3 120

4 150

5 200

If the price of a printer is $50 in this perfectly competitive industry, what is the profit-maximizing rate of output?

7. Which of the following is NOT true in a perfectly competitive market?

a. There is free entry and exit into the industry.

b. Each firm produces a differentiated product.

c. Each firm faces a perfectly elastic demand curve.

d. Price is equal to marginal revenue at every output level for the firm.

8. A perfectly competitive firm should always continue to operate in the short run as long as:

a. P < ATC at the rate of output where MR = MC.

b. P < AVC at the rate of output where MR = MC.

c. MR > AVC at the rate of output where MR = MC.

d. MR > AFC at the rate of output where MR = MC.

9. A firm that makes zero economic profits:

a. Must eventually go bankrupt.

b. Should shut down.

c. Incurs a loss, but should not shut down.

d. Covers all its costs, including a provision for normal profit.

10. A monopoly firm is different from a competitive firm in that:

A. There are many substitutes for the monopolistâs product whereas the competitive firmâs demand curve is perfectly elastic.

B. The monopolistâs demand curve is perfectly inelastic, whereas the competitive firmâs demand curve is perfectly elastic.

C. The monopolist can influence the price in the market, whereas the competitive firm is a price taker.

D. All of the above

taupewombat30

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?

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?

ECO101H1 Lecture Notes - Lecture 15: Perfect Competition, Market Price, Organic Food

ECO101H1 Full Course Notes

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