ECO 405 Lecture Notes - Lecture 11: Marginal Revenue, Demand Curve, Takers

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schen84

4 Jun 2020

School

University at Buffalo

Department

Economics

Course

ECO 405

Professor

Monica Cherry

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Document Summary

Example 11. 1 marginal revenue from a linear demand function. Demand curve for a sub sandwich is q = 100 10p. To find mr we need to find tr(q) ie, pq should only be a function of q. Total revenue: r = pq = (-q/10+10)q = Mr < p for all values of q. If the average and marginal costs are constant () Profit maximizing quantity: mr = mc, p(q*) = -30/10+10= . 00. Directly related to the elasticity of the demand curve facing the firm. Percentage change in quantity that results from a one percent change in price. Multiply the 2nd term by p/p (1) and factor out p. If demand curve slopes downward and mr = p eq,p < 0 and mr < p. If demand is elastic: eq,p < -1 and mr > 0. If demand is inelastic: eq, p > -1 and mr < 0. If demand in unit elastic: eq,p = 1 and mr = 0.

Related Questions

A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at that low level. b. It is a price-taker who is producing too much. c. It is a monopolist who is producing the socially optimal quantity. d. The firm is producing rationally.

6. A single-price monopolist sets price a. where MR=demand. b. where supply=demand c. from the demand curve at the quantity for which MC=MR. d. where MR=MC.

7. Assume that the Law of Diminishing Marginal Product applies at the current output level of a competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average total cost is $20. To maximize profits the firm should: a. produce the current output level, since average revenue (price) = average cost. b. produce more since marginal revenue exceeds marginal cost at current output. c. produce less since marginal revenue is always below average revenue. d. any of the above is possible, without further information.

8. Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)

9. If a firm in a competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.

10. When a competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.

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

1. A monopolistically competitive market could be considered tobe inefficient because

marginal cost exceeds marginal revenue (MC > MR).

price is always greater than average cost (P > AC).

price is greater than marginal cost (P > MC).

average cost (AC) is rising.

2. Barriers to entry are used to
Answer

enable a firm to exercise control over the price of itsproduct.

prevent other firms from entering the market.

allow the firm to earn economic profit.

All of the above.

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ECO 405 Lecture Notes - Lecture 11: Marginal Revenue, Demand Curve, Takers

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