ECO100Y5 Lecture Notes - Price Discrimination, Average Variable Cost, Profit Maximization

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Ch10&12: unlike a perfectly competitive firm, a monopolist faces a negatively sloped demand curve, average revenue: tr=p*q , ar= tr/q= p*q/q=p, marginal revenue: mr= tr/ q. The monopolist"s marginal revenue is less than the price at which it sells its output. Thus the monopolist"s mr curve is below its demand curve: short-run profit maximization. Rule1: the firm should not produce at all unless price (average revenue) exceed average variable cost. Rule 2: if the firm does produce, it should produce a level of output such that marginal revenue equals marginal cost. Nothing guarantees that a monopolist will make positive profits in the short run, but if it suffers persistent losses, it will eventually go out of business: supply curve for monopolist. A monopolist does not have a supply curve because it is not a price taker; it chooses its profit-maximizing price-quantity combination from among the possible combinations on the market demand curve: competition and monopoly compared.

Related Questions

8. SMC always passes through the

a. minimum of both short run total cost curve and short run variable cost curve.

b. minimum of both short run average cost curve and short run average variable cost curve.

c. minimum of the long run average curve.

d. minimum of the short run average cost curve only.

9. In the first-degree price discrimination consumer surplus is

a. determined by elasticity of demand.

b. determined by the difference between P and MR

c. determined by area under the demand curve minus price.

d. zero.

10. A price taker firm faces a

a. perfectly elastic demand curve

b. declining marginal revenue

c. perfectly elastic supply curve

d. declining market demand curve

11. For a discriminating monopolist, the price is usually

a. higher in the market which has elastic demand

b. higher in the market which has inelastic demand.

c. lower in the market which has inelastic demand

d. higher in the market which as higher marginal revenue.

12. At the point of inflection on the total cost curve.

a. marginal and average costs are equal.

b. marginal cost is maximum.

c. marginal cost is minimum.

d. average cost is minimum.

e. marginal product is minimum.

13. A discriminating monopolist must allocate output by the law of

a. equi-marginal utility c. equi-marginal productivity

b. equi-marginal revenue d. equi-marginal cost

byzantiumsalmon293

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 price-taking firmâs short-run supply curve is

a. the portion of its marginal cost curve above the average variable cost curve.

b. its average total cost curve.

c. its average variable cost curve.

d. its entire marginal cost curve. e. none of the above.

2. Which of the following is incorrect?

a. For a firm facing a downward-sloping demand curve, marginal revenue will be less than price.

b. In making output decisions, a firm should produce the output level for which marginal revenue equals marginal cost.

c. A price-taking firm will maximize profits by choosing that level of output for which price equals marginal cost.

d. The demand curve facing a price-taking firm is downward-sloping to the right.

ECO100Y5 Lecture Notes - Price Discrimination, Average Variable Cost, Profit Maximization

ECO100Y5 Full Course Notes

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