ECON 110 Chapter Notes - Chapter 8: Profit Maximization, Marginal Product, Technological Change

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Chapter 8 producers in the long run. The profit-maximizing firm will try to be technically efficient, which means using no more of all inputs than necessary. Technical efficiency is not enough for profits to be maximized. If it wants to maximize it profits, it should choose the lowest cost combination of labour and capital. Labour and capital are assumed to be variable. If a firm wants to maximize its profit then it should select at the production method that produces its output at the lowest possible cost. The firm should substitute one factor for another as long as the marginal product of one factor per dollar spent on it is greater than the marginal product of the other factor per dollar spent on it. Whenever the ratio of the marginal product of each factor to its price is not equal for all factors, there are possibilities for factor substitutions that will reduce costs.

Related Questions

1. If the price faced by a competitive firm is greater than its average variable cost, the firm:

a. should produce the output level where P=MC and it is making a positive profit
b. should produce that output level where P=MC and it is incurring loss
c. should produce that output level where P=MC and it may make a positive profit or incur a loss
d. none of the above

2. When a firm in perfect competition is maximizing profits and produces that level of output where price, marginal revenue, marginal cost, average total cost, long-run marginal cost, and long run average total cost are all equal, the firm:

a. earns a positive economic profit and it serves to signal other competing firms to enter the market
b. earns a positive economic profit that can be continued in the long run
c. earns zero economic profit and is in a long run equilibrium
d. incurs a loss and will shut own in the long run

emeraldrat340

1. A monopoly firm is different from a competitive firm in that:
A. There are many substitutes for the monopolist's product, whereas there are no close substitutes for the competitive firm's product
B. The monopolist's demand curve is perfectly inelastic, whereas the competitive firm's demand curve is perfectly elastic
C. The monopolist is a price-maker, whereas the competitive firm is a price-taker
D. The monopolist always earns economic profits in the long run, whereas the competitive firm never earns economic profits in the long run

2. In the long run, an entrepreneur managing a perfectly competitive firm will earn:
A. Zero normal profits B. Economic profits and normal profits
C. The opportunity cost of operating the firm D. Negative economic profits

3. Refer to the graph above. The maximum possible total profit this monopolist can earn per day is:
A. $0 B. $1800 C. $2400 D. $4200

4. If marginal cost exceeds marginal revenue, the firm

A. is most likely to be at a profit-maximizing level of output.

B. should increase the level of production to maximize its profit.

C. must be experiencing losses.

D. may still be earning a profit.

5. A perfectly competitive firm maximizes profit by producing 500 units of output

purplegerbil891

Long-run factor demand

A price-taking firm (p = 100) chooses amounts of labor and capital that maximize its profits. It has decreasing returns to scale Cobb-Douglass production function: q(L, K) = L ^(1/6) K ^(1/8). The wage rate and rental rate of capital are 10 (w = r = 10).

(a) Set up the profit function.

(b) Provide the two profit maximization conditions for this case (no need to solve for L , K ).

bronzegoose52

ECON 110 Chapter Notes - Chapter 8: Profit Maximization, Marginal Product, Technological Change

ECON 110 Full Course Notes

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