ECON 2020 Lecture Notes - Lecture 9: Perfect Competition

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cyanprairie-dog707

10 Sep 2017

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Sr loss scenario: operate at the profit-maximizing level of output (5 units) Or: suspend production (producing 0 units, tfc = . Prove: the best that a perfectly competitive firm can expect to earn in the long-run is a normal (sh) profit. Accounting profit: profit = total revenue total cost. Economists profit: profit = total revenue total cost. = (p x q) (tfc + tvc) direct, explicit. = (p x q) (atc x q) Profit > sh: we call this positive profit or above-normal profit. When we calculate a profit greater than zero, the suggestion is that the firm is doing better in this market than in its next best alternative. Profit = sh: we call this breakeven profit or normal profit. When we calculate a profit that is equal to zero, the suggestion is that the firm is doing as well in this market as it could in its next best alternative.

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?

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?

bluechimpanzee690

1. A monopoly firm is different from a competitive firm in that:
A. There are many substitutes for the monopolist's product, whereas there are no close substitutes for the competitive firm's product
B. The monopolist's demand curve is perfectly inelastic, whereas the competitive firm's demand curve is perfectly elastic
C. The monopolist is a price-maker, whereas the competitive firm is a price-taker
D. The monopolist always earns economic profits in the long run, whereas the competitive firm never earns economic profits in the long run

2. In the long run, an entrepreneur managing a perfectly competitive firm will earn:
A. Zero normal profits B. Economic profits and normal profits
C. The opportunity cost of operating the firm D. Negative economic profits

3. Refer to the graph above. The maximum possible total profit this monopolist can earn per day is:
A. $0 B. $1800 C. $2400 D. $4200

4. If marginal cost exceeds marginal revenue, the firm

A. is most likely to be at a profit-maximizing level of output.

B. should increase the level of production to maximize its profit.

C. must be experiencing losses.

D. may still be earning a profit.

5. A perfectly competitive firm maximizes profit by producing 500 units of output

purplegerbil891

ECON 2020 Lecture Notes - Lecture 9: Perfect Competition

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