ECO100Y1 Lecture Notes - Lecture 8: Marginal Revenue, Perfect Competition, Demand Curve

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18 Jan 2018

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Total revenue, average revenue, marginal revenue for perfectly competitive firm: example. Q p tr (p*q) ar (tr/q) mr (cid:894) tr/ q(cid:895) Marginal revenue: the change in total revenue from an additional unit sold. Average revenue: total revenue divided by the quantity sold. Profit maximization: insight: firms are price takers (cannot influence price, must choose level of output that maximizes profits, given market price. At q2(q0): mr=mc profit-maximizing output (do not change output) To find the profit-maximizing le(cid:448)el of output (cid:894)(cid:395)(cid:895), the only cost schedule (cid:449)e (cid:374)eed is the fi(cid:396)(cid:373)"s mc schedule. [the only variable a perfectly competitive firm can change is its output, not price, because it has a perfectly elastic demand curve. Consumers are willing to buy unlimited amount of products at a fixed (market) price, but quantity will be zero if the price changes, therefore, revenue will fall to zero. ] If price is ____, firm will supply ____.

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?

(1)	(2)	(3)	(4)	(5)	(6)	(7)
Output (Q)	Price per Unit (P)	Total Revenue (TR)	Marginal Revenue (MR)	Total Cost (TC)	Average Total Cost (ATC)	Marginal Cost (MC)
0	$10			$8
1	9			11
2	8			12
3	7			15
4	6			24
5	5			35
6	4			48

Does this data represent the revenues and costs of a perfect competitive firm or a firm with some degree of âmonopoly powerâ? ______________________

How do you know? ________________________________________________

Fill in the blanks in the table above.

How much output should this firm produce to maximize itâs profit? _____units. What price should this firm charge for its product? $_____ per unit.

This choice of output and price will lead to an economic profit = $______

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

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ECO100Y1 Lecture Notes - Lecture 8: Marginal Revenue, Perfect Competition, Demand Curve

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