ECO102H1 Lecture Notes - Lecture 18: Imperfect Competition, Marginal Revenue, Perfect Competition

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Eco100y1 lecture 18 firms in competitive markets i. There are 4 types of markets, this (a competitive market) is an extreme case. Because of points 1 and 2 each buyer and seller is a price taker and changes in prices are exogenous developing from eternal factors) Tr = p q (the price for a unit units sold) Q = p (because of the above equation) Q (the change in total revenue from selling additional units divided by additional units sold) (slide 4 chart): This is characteristic of this market, it"s independent of q. The mr for the first unit sold is and it"s always for the subsequent units sold. Price is always equal to mr, p = mr in this perfectly competitive market, this is a rule of this kind of market. This distinguishes this market from imperfectly competitive markets.

Related Questions

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?

A small firm faces an inverse demand function of P = 100 - Q. Its total cost function is given by TC = .5Q2. (You should see right away that marginal revenue is thus MR = 100 - 2Q, and it also happens that marginal cost is just MC = Q. Both MR and MC are the first derivatives of total revenue and total cost. And a quick comment on MC: unlike some marginal cost functions we've seen, this one is not constant, because marginal cost is getting $1 higher with each additional unit of output.)

The Chief Executive Officer will manage the firm, choosing output and price. Currently, the CEO is negotiating an incentive-based contract with the shareholders of the company.
(Hint: basing compensation on revenue will motivate revenue maximization rather than profit maximization!)

Hint: since the plan creates incentives for the CEO to maximize revenue rather than profit, you should not set MR = MC at this point. BIG hint: revenue is maximized when selling an additional unit won't increase your revenue, or in math terms, when MR = 0.)

Owners' proposal: CEO keeps 10% of TR.

Firm price:
Firm output:
Total revenue:
Firm profit:
CEO compensation:
Remaining profit for owners:

redfrog477

During recent years, Microchips Corp. has enjoyed substantial economic profits derived from patents covering a wide range of inventions and innovations for microprocessors used in high-performance desktop computers. A recent introduction, the Penultimate, has proven especially profitable. Market demand and marginal revenue relations for the product are as follows:

P = $5,500 - $0.005 Q

MR = âTR/âQ = $5,500 - $0.01Q

Fixed costs are nil because research and development expenses have been fully amortized during previous periods. Average variable costs are constant at $4,500 per unit.

A. Calculate the profit-maximizing price-output combination and economic profits if MicroChips enjoys an effective monopoly because of patent protection.

B. Calculate the price-output combination and total economic profits that would result if competitors offer clones that make the market perfectly competitive.

(Please show the steps)

salmonsea-lion270

ECO102H1 Lecture Notes - Lecture 18: Imperfect Competition, Marginal Revenue, Perfect Competition

ECO102H1 Full Course Notes

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