ECON-UA 2 Lecture Notes - Lecture 12: Profit Maximization, Demand Curve, Marginal Revenue

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17 Nov 2014

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Econ-ua 2 - introduction to microeconomics - lectures 12/13/14: profit maximization. Profit maximization is the goal of firms. Accounting profit (only explicit costs) vs economic profit (explicit and implicit costs) Demand curve facing the firm: the quantity of output that customers will purchase from a particular firm at given prices. Shows the maximum price the firm can charge for a given level of output. Must pay prices for each input it uses. Firm"s profit is the difference between tc and tr at each output level. Choose the output level where profit is greatest. Firms should produce the quantity of output where the vertical distance between. Tr and tc curves is greatest and tr is above tc. Marginal revenue: the change in total revenue from producing one more unit of output. Tells us how much revenue rises per unit increase in output.

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?

Use the figure below to answer the following question. Total revenue and total cost (dollars) C TR Quantity Figure 8 43) Refer to Figure 8, which shows a perfectly competitive firm's total revenue and total cost curves. Which one of the following statements is false? A) At an output of Q1 units a day, the firm makes zero economic profit. B) At an output of Q2 units a day, the firm incurs an economic loss. C) At an output greater than Q3 units a day, the firm incurs an economic loss. D) Economic profit is the vertical distance between the total revenue curve and the total cost curve. E) At an output less than Q1 units a day, the firm incurs an economic loss.

Given following Price and Total Cost functions:

P = 120 - 7Q

TC = 40 + 70Q - 10Q² + 0.6Q³

Where P = price, and Q is output.

Fill in the table below and answer the questions below the table.

Q	P	FC	TVC	TC	TR	Profit
0
1
2
3
4
5
6
7
8
9
10

If your company's goal is to maximize profit, answer the following questions below:

What price will you charge for your product?

What quantity will you produce?

And what would be your maximum profit or minimum loss at the price and output you chose?

2. If your company's goal is to maximize total revenue, answer the following questions below:

What price will you charge for your product?

What quantity will you produce?

And what would be your maximum total revenue at the price and output you chose? (3 points)

Question 3

Given a firm with the following cost data, fill in the table below.

Q = OUTPUT TFC = Total Fixed Cost AVC = Average Variable Cost ATC = Average Total Cost TVC = Total Variable Cost MC = Marginal Cost TC = Total Cost

Q	FC	TVC	TC	AVC	ATC	MC
0				---	---	---
1						10
2
3				10		10
4

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ECON-UA 2 Lecture Notes - Lecture 12: Profit Maximization, Demand Curve, Marginal Revenue

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