ECON 1B03 Study Guide - Final Guide: Sunk Costs, Demand Curve, Perfect Competition

29 views10 pages

ultramarinellama346

9 Dec 2016

School

Department

Course

Professor

For unlimited access to Study Guides, a Grade+ subscription is required.

Shanghaibalcony1234 and 37744 others unlocked

ECON 1B03 Full Course Notes

Verified Note

46 documents

Document Summary

A market structure defined by many small firms selling homogenous output. Firms can enter and exit the industry freely. Consumers and firms are price takers; i. e. market equilibrium price is the price that buyers will pay and the producers will receive for every good bought and sold. Total revenue: is the selling price times the quantity sold. Since price is known the tr curve is a linear function of q. When tr curve is above the tc curve the area between is profit. Avenue revenue, ar: the revenue generated by the sale of a typical unit of output ar = tr/q . Ar = p x q/ q = p. Marginal revenue, mr: is the addition of the firm"s total revenue from the sale of another good. Marginal re(cid:448)e(cid:374)ue if the slope of the total re(cid:448)e(cid:374)ue fu(cid:374)(cid:272)tio(cid:374). Total re(cid:448)e(cid:374)ue is at (cid:373)axi(cid:373)u(cid:373) (cid:449)he(cid:374) mr = 0 .

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?

The average revenue (demand) for product Q is given by AR = 50 - Q and the total cost of Q by:

STC = 100-4Q+2Q^2

a. Find the price function and then the TR function. See Assignment 3 or 4 for an example. Hint: another name for price is average revenue (AR).

b. Write the MR and MC functions below. Remember: MR = dTR/dQ and MC = dSTC/dQ. See Assignment 5 for a review of derivatives.

c. What positive value of Q will maximize total profit? Remember, letting MR = MC signals the objective of total profit maximization. Solve MR = MC for Q. The value of Q you get should not be zero or negative.

d. Use the price function found in (a) to determine the price per unit that will need to be charged at the Q found in (c). This will be the price you should ask for the total profit maximizing quantity.

e. What total profit will result from selling the quantity found in (c) at the price found in (d)? Hint: the profit function is found as TR â STC.

orangemole416

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

ECON 1B03 Study Guide - Final Guide: Sunk Costs, Demand Curve, Perfect Competition

ECON 1B03 Full Course Notes

Document Summary

Get access

Related Documents

ECON 1B03 Chapter Notes - Chapter 8-13: Marginal Revenue, Monopoly Profit, Taipei Metro

ECON 1B03 Lecture Notes - Lecture 1: Economic Equilibrium, Marginal Revenue, Perfect Competition

ECON 1B03 Chapter Notes - Chapter 8: Economic Equilibrium, Perfect Competition, Marginal Revenue

Related Questions