ECON 1B03 Chapter Notes - Chapter 14: Marginal Revenue, Perfect Competition

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Average revenue, ar, tells us how much revenue a firm receives for the typical unit sold. Marginal revenue = the change in total revenue from an additional unit sold. Mr is the slope of the total revenue function. Mr = p for a perfectly competitive firm. A profit-maximizing firm will produce a quantity of point where. The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue => p = mc. In perfect competition, a firm will produce where. P = mr = mc that is, where p = mc. The firm maximizes profit by producing the quantity at which mc = mr where p = mc. When mr > mc, the firm should increase q (producing one more good will add more to tr than to tc: at q1). When mr < mc, the firm should decrease q (producing that good adds more to tc than to tr :

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?

1. Profit Maximization under Monopoly.

1.1. Fill in the blanks in the following table using Excel formulas:

Q	P	TR	TFC	TVC	AVC	TC	AC	MR	MC
0			311,250		0.00
10,000					12.00
20,000					11.50
30,000					12.67
40,000					14.25
50,000					16.00
60,000					17.83
70,000					19.71

The demand function is given by: P=50-0.00025Q

1.2. Construct line charts for the Average Cost (AC), Average Variable Cost (AVC), Marginal Cost (MC), Marginal Revenue (MR), and Average Revenue (AR) on a Cartesian coordinate system.

viridianprairie-dog44

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

ECON 1B03 Chapter Notes - Chapter 14: Marginal Revenue, Perfect Competition

ECON 1B03 Full Course Notes

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