ECON 20a Lecture 13: Growth Rate & Real GDP per Capita
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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 local snow cone business sells snow cones in one size for $5. It has the following cost and output structure per hour.
Output (cones per hour) |
Total Cost (per hour) |
0 |
$40 |
10 |
85 |
20 |
120 |
30 |
145 |
40 |
160 |
50 |
195 |
60 |
245 |
70 |
300 |
80 |
370 |
a) Calculate the total revenue for the business at each rate of output. ($500)
b) Calculate the total profit for the business at each rate of output. ($500)
c) Is the business operating in the short run or the long run? ($500)
d) Calculate the profit-maximizing rate of output using the MR = MC rule. (Note: to do this you should first compute the marginal revenue and marginal cost from the table.) ($500)
Answer:
Output (cones per hour) |
TR |
Total Cost (per hour) |
Profit |
MR |
MC |
0 |
Ā | Ā | Ā | Ā | Ā |
10 |
Ā | Ā | Ā | Ā | Ā |
20 |
Ā | Ā | Ā | Ā | Ā |
30 |
Ā | Ā | Ā | Ā | Ā |
40 |
Ā | Ā | Ā | Ā | Ā |
50 |
Ā | Ā | Ā | Ā | Ā |
60 |
Ā | Ā | Ā | Ā | Ā |
70 |
Ā | Ā | Ā | Ā | Ā |
80 |
Ā | Ā | Ā | Ā | Ā |