ECO101H1 Lecture Notes - Perfect Competition

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Mr = mc => q* is profit - maximizing level of output. If commodity is infinitely divisible, there is a unique profit-maximizing level of output at mr=mc: graphs (implicit, calculus. If commodity is not infinitely divisible, there are two levels of output - before mr=mc and after. Mr=mc - where profit is the same: numerical examples, see text, table 14. 2 (page 295) for an example. Tr > tc => profits => tr/q > tc/q <=> p > atc. Tr = tc => breakeven <=> p = atc. Tr < tc => loss => tr/q p < atc. Profit - maximizing output: 10 (p = mc) Profit: (p - atc) * q = (25 - 20) * 10 = 50. Economic profit: (p - atc) * q (25 - 30) *10 = - 50. Firm produces q=10 which implies that p > avc since firm does not shut down. Question: what would happen if firm raised price to .

Related Questions

NUMBER 3.

You have the follwoing information for a firm:

TR = 200 Q â Q² MR = 200 â 2 Q

TC = 1000 - 8 Q + Q² MC = - 8 + 2 Q

a. If the firm produces 60 units of output, what are profits or losses for this firm.

b. Is the firm maximizing profits producing Q = 60? If not, what is the profit maximizing

level of output produced?

c. What are maximum profits?

NUMBER 4.

A firm is currently producing 80 units of output. At this level of output produced, P = 150 and ATC = 120. Also asume that MC = 130 and MR is constant at all output levels and equal to 150.

a. Is this firm making profits? If so, what are these profits?

b. Is this firm maximizing profits? If not, what would you recommend this firm do to

maximize profits? Why?

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?

6. Power Printers Total Costs (per hour)

q TC

0 65

1 80

2 95

3 120

4 150

5 200

If the price of a printer is $50 in this perfectly competitive industry, what is the profit-maximizing rate of output?

7. Which of the following is NOT true in a perfectly competitive market?

a. There is free entry and exit into the industry.

b. Each firm produces a differentiated product.

c. Each firm faces a perfectly elastic demand curve.

d. Price is equal to marginal revenue at every output level for the firm.

8. A perfectly competitive firm should always continue to operate in the short run as long as:

a. P < ATC at the rate of output where MR = MC.

b. P < AVC at the rate of output where MR = MC.

c. MR > AVC at the rate of output where MR = MC.

d. MR > AFC at the rate of output where MR = MC.

9. A firm that makes zero economic profits:

a. Must eventually go bankrupt.

b. Should shut down.

c. Incurs a loss, but should not shut down.

d. Covers all its costs, including a provision for normal profit.

10. A monopoly firm is different from a competitive firm in that:

A. There are many substitutes for the monopolistâs product whereas the competitive firmâs demand curve is perfectly elastic.

B. The monopolistâs demand curve is perfectly inelastic, whereas the competitive firmâs demand curve is perfectly elastic.

C. The monopolist can influence the price in the market, whereas the competitive firm is a price taker.

D. All of the above

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ECO101H1 Lecture Notes - Perfect Competition

ECO101H1 Full Course Notes

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