Profit and Revenue Maximization


 Richard Turner
 1 years ago
 Views:
Transcription
1 WSG7 7/7/03 4:36 PM Page 95 7 Profit and Revenue Maximization OVERVIEW The purpose of this chapter is to develop a general framework for finding optimal solutions to managerial decisionmaking problems. This focuses on the decisionmaking process with respect to two organizational objectives: Profit maximization and total revenue maximization. This chapter considers profit maximization from two perspectives. At a more practical level, management will attempt to maximize profits by employing just the right amount of each factor of production subject to a predefined budget constraint. At a much more general level, profit maximization may be viewed as an unconstrained or constrained optimization problem where the decision variable is the firm s level of output. The marginal product of labor (MP L ) is the change in total output given a unit change in the amount of labor used. The marginal revenue product of labor (MRP L ) is the change in the firm s total revenue resulting from a unit change in the amount of labor used. The marginal revenue product is the marginal product of labor times the selling price of the product, i.e., MRP L = P MP L. Total labor cost is the total cost of labor. The total cost of labor is the wage rate times the total amount of labor employed. The marginal resource cost of labor (MRC L ) is the change in total labor cost resulting from a unit change in the number of units of labor used. If the wage rate (P L ) is constant, then the wage rate is equal to the marginal cost of labor. A profitmaximizing firm that operates in perfectlycompetitive output and input markets will employ additional units of labor up to the point Managerial Economics: Theory and Practice 95 Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.
2 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization where the marginal revenue product of labor is equal to the marginal labor cost, i.e., P MP L = P L. In general, for any variable input the optimal level of variable input usage is defined by the condition P MP i = P i. The optimal combination of multiple inputs is defined at the point of tangency between the isoquant and isocost curves. The isoquant curve represents the different combinations of capital and labor that produces the same level of output. The slope of the isoquant is the marginal rate of technical substitution. The isocost curve represents the different combinations of capital and labor that the firm can purchase with a fixed operating budget and fixed factor prices.the slope of the isocost curve is the ratio of the input prices. The optimal combination of capital and labor usage is defined by the condition MP L /MP K = P L /P K. This condition may be rewritten as MP L /P L = MP K /P K, which says that a profitmaximizing firm will allocate its budget in such a way that the last dollar spent on labor yields the same amount of additional output as the last dollar spent on capital. This condition defines the firm s expansion path. The objective of profit maximization may be dealt with more directly. The problem confronting the decisionmaker is to choose an output level that will maximize profit. Define profit as the difference between total revenue and total cost, both of which are functions of output, i.e., p(q) = TR(Q)  TC(Q). The objective is to maximize this unconstrained objective function with respect to output. The firstorder and secondorder conditions for a maximum are dp/dq = 0 and d 2 p/dq 2 < 0, respectively. The profitmaximizing condition is to produce at an output level at which MR = MC. Although profit maximization is the most commonly assumed organizational objective, firms that are not owneroperated, or firms that operate in an imperfectly competitive environment often adopt an organizational strategy of total revenue maximization. The firstorder and secondorder conditions are dtr/dq = 0 and d 2 TR/dQ 2 < 0, respectively. Assuming that firms are price takers in resource markets (the price of labor and capital are fixed), because price and output are always positive, it can be easily demonstrated that the output level that maximizes total revenue will always be greater than the output level that maximizes total profit. This is because of the law of diminishing marginal product guarantees that the rate of increase in marginal cost is greater than the rate of increase in marginal revenue.
3 WSG7 7/7/03 4:36 PM Page 97 Multiple Choice Questions 97 MULTIPLE CHOICE QUESTIONS 7.1 Consider the production function Q = f(k, L), where K is capital and L is labor. The isocost equation: A. Summarizes the optimal employment of K and L when factor prices are varied. B. The same thing as an isoquant, except that K and L are measured in money terms. C. Summarizes all the possible combinations of K and L that firm can purchase with a given operating budget and variable factor prices. D. Summarizes all the possible combinations of K and L that firm can purchase with a given operating budget and fixed factor prices. 7.2 Suppose that the firm s operating budget is $10,000 and that the price of labor (P L ) and price of capital (P K ) are $25 and $50, respectively. The firm should hire: A. 100 units of labor and 150 units of capital. B. 100 units of labor and 200 units of capital. C. 150 units of labor and 100 units of capital. D. 200 units of labor and 150 units of capital. 7.3 Suppose that Q = f(k, L). If K is measured along the vertical axis and L is measured along the horizontal axis, then an increase in the firm s operating budget will cause: A. A parallel shift of the isocost curve towards the origin. B. A parallel shift of the isocost curve away from the origin. C. The isocost curve to rotate in a counter clockwise direction. D. The isocost curve to rotate in a clockwise direction. 7.4 Suppose that Q = f(k, L). If K is measured along the vertical axis and L is measured along the horizontal axis, then an increase in rental price of capital (P K ) will cause: A. A parallel shift of the isocost curve towards the origin. B. A parallel shift of the isocost curve away from the origin. C. The isocost curve to rotate in a counter clockwise direction. D. The isocost curve to rotate in a clockwise direction. 7.5 Suppose that Q = f(k, L). If K is measured along the vertical axis and L is measured along the horizontal axis, then an increase in rental price of labor (P L )will cause:
4 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization A. A parallel shift of the isocost curve towards the origin. B. A parallel shift of the isocost curve away from the origin. C. The isocost curve to rotate in a counter clockwise direction. D. The isocost curve to rotate in a clockwise direction. 7.6 Suppose that Q = f(k, L) where K is measured along the vertical axis and L is measured along the horizontal axis. The slope of the isocost curve is: A. MP L /MP K. B. MP K /MP L. C. P L /P K. D. P K /P L. 7.7 Suppose that Q = f(k, L) where K is measured along the vertical axis and L is measured along the horizontal axis. An increase in P K and P L will cause: A. A parallel shift of the isocost curve towards the origin. B. A parallel shift of the isocost curve away from the origin. C. The isocost curve to rotate in a counter clockwise direction. D. The isocost curve to rotate in a clockwise direction. 7.8 Suppose that Q = f(k, L) where K is measured along the vertical axis and L is measured along the horizontal axis. The leastcost combination of K and L is achieved when: A. When the slope of the isocost line is greater than the slope of the isoquant. B. When the slope of the isoquant is greater than the slope of the isocost line. C. When the slope of the isocost line is equal to the slope of the isoquant. D. When the slope of the isocost line is tangent to the isoquant. E. Both C and D are correct. 7.9 Suppose that Q = f(k, L) where K is measured along the vertical axis and L is measured along the horizontal axis. Suppose that at some input combination the slope of the isocost line is steeper than the slope of the isoquant. To increase output the firm should: A. Hire more K and less L. B. Hire more L and less K. C. Hire more of both K and L. D. Hire less of both K and L.
5 WSG7 7/7/03 4:36 PM Page 99 Multiple Choice Questions Suppose that Q = f(k, L). A firm that is using K and L efficiently when: A. P MP L = P L. B. P MP K = P K. C. MP L /MP L = P L /P K. D. Both A and B are correct. E. A, B, and C are correct Suppose that Q = f(k, L). If MP L /MP K > P L /P K, then: A. The firm should hire more capital. B. The firm should hire more labor. C. The firm should increase the price of labor. D. The firm should increase the price of capital. E. None of the above Suppose that a perfectlycompetitive firm is producing efficiently. If the rental price of labor (wage rate) is $6.25 and the marginal product of labor is 1.25 units, then the selling price of the product is: A. $1.50. B. $3.50. C. $5.50. D. $7.50. E. None of the above are correct Suppose that the selling price of a product is $ If the rental price of price of capital is $50, then marginal product of capital is: A. 1 unit. B. 2 units. C. 3 units. D. 4 units. E. None of the above are correct Suppose that the rental price of capital is $22 units and the selling price of a product is $ The marginal product of labor is: A. 1 unit. B. 2 units. C. 3 units. D. 4 units. E. Cannot be determine from the information provided.
6 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization 7.15 Suppose that the firm s production function is Q = 2L 0.5, where L represents units of labor. If the firm is operating efficiently, then the selling price of the product is: A. $10. B. $50. C. $100. D. $ Suppose that the firm s production function is Q = 20K 0.5 L 0.5, where K is capital and L is labor. Suppose that K = 25, L = 100, and the rental price of capital is $80. If the firm is operating efficiently, then the price of the product is: A. $1.25. B. $3.20. C. $4.00. D. $ Suppose that Q = f(k, L). If MP L = 12, MP K = 24, P L = $50 and P K = $100, then a profit maximizing firm should: A. Hire more labor. B. Hire more capital. C. Hire more labor and capital. D. Do nothing Suppose that Q = f(k, L), where K is capital and L is labor. The expansion path of a CobbDouglas production function is: A. Always linear. B. Always quadratic. C. Always cubic. D. Depends upon whether the production function exhibits increasing, decreasing or constant returns to scale Suppose that Q = f(k, L) where K is measured along the vertical axis and L is measured along the horizontal axis. The slope of the expansion path is: A. The capitallabor ratio. B. The laborcapital ratio. C. The outputcapital ratio. D. The outputlabor ratio Suppose that Q = 56K 0.4 L 0.8 where K is measured along the vertical axis and L is measured along the horizontal axis. If the rental price of labor and capital are $80 and $40, respectively, then the firm s expansion path is:
7 WSG7 7/7/03 4:36 PM Page 101 Multiple Choice Questions 101 A. 0.8(56)K 0.4 L 0.2 = 80. B. 0.4(56)K 0.6 L 0.8 = 40. C. K = L. D. K/L = 80/ Suppose that the firm s profit equation is p = Q 8Q 2.The profitmaximizing level of output for this firm is: A. 14 units. B. 18 units. C. 22 units. D. 26 units Suppose that the firm s profit equation is p = Q 8Q 2.The maximum profit for this firm is: A. $2,420. B. $3,860. C. $4,620. D. $5, A profitmaximizing firm must always produce at an output level where: A. P = ATC. B. P = AVC. C. MR = ATR. D. P = MC Profit is maximized at the output level where the: A. Slope of the total revenue curve is greater than the slope of the total cost curve. B. Slope of the total revenue curve is the same as the slope of the total cost curve. C. Slope of the total revenue curve is less than the slope of the total cost curve. D. Slope of the marginal revenue curve is equal to slope of the marginal cost curve A perfectlycompetitive firm maximizes profit at the output level where: A. Mp = 0. B. P = MC. C. MR = MC. D. Both A and C are correct. E. All of the above.
8 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization 7.26 The marketdetermined price of a product is $4. The total cost equation of a firm in a perfectlycompetitive industry is TC = Q + Q 2. The profitmaximizing rate of output is: A. 3 units. B. 4 units. C. 5 units. D. 6 units A monopolist maximizes profit at the output level where: A. Mp = 0. B. P = MC. C. MR = MC. D. Both A and C are correct. E. All of the above The market demand for the output of a monopolist is Q = P. The monopolist s total cost equation is TC = 1, Q + Q 2. To maximize total profits the monopolist should charge a price of: A. $100. B. $250. C. $380. D. $ The market demand for the output of a monopolist is Q = P. The monopolist s total cost equation is TC = 1, Q + Q 2. A revenuemaximizing monopolist would charge a price of: A. $ B. $ C. $ D. $ Suppose that a firm s total profit equation is p =2, x + 110y  5xy  0.5x 20.5y 2, where x and y represent the output levels from two production processes. The profit maximizing combination of x and y is: A. x = 10 and y = B. x = and y = 45. C. x = 50 and y = D. x = and y = 50.
9 WSG7 7/7/03 4:36 PM Page 103 Shorter Problems 103 SHORTER PROBLEMS 7.1 Suppose that a firm produces at an output level where MP L = 60 and P L = $30. Suppose, further, that MP K = 125 and P K = $50. A. Is this firm producing efficiently? B. If the firm is not producing efficiently, then how might it do so? 7.2 Suppose that a firm produces at an output level where MP L = 36 and P L = $12. Suppose, further, that MP K = 48 and P K = $24. A. Is this firm producing efficiently? B. If the firm is not producing efficiently, then how might it do so? 7.3 A firm s production function is given by the equation: Q = 15K 0.65 L 0.25 where input prices are P L = $5 and P K = $15. Determine the equation of the expansion path. 7.4 Suppose that a profitmaximizing firm s production function is Q = 125(0.2K + 0.4L) where Q, K and L represent units of output, capital, and labor, respectively. A. Suppose that the price of capital per unit is P K = $25 and the price of labor per unit is P L = $ What is the optimal input combination for this firm? B. Suppose that the price of capital remains P K = $25, but the price of labor rises to P L = $50. What is the firm s optimal input combination? C. Suppose that the price of capital falls to P K = $5, while the price of labor remains unchanged at P L = $50. What is the firm s optimal input combination? 7.5 Suppose that a firm s estimated production function is: Q = 25L 0.6 K 0.6 where Q represents units of output, K represents units of capital, and L represents units of labor. Suppose that the rental price of labor is P L = $100. If L = 15 and the price of the product is $5, estimate the optimal level of capital input.
10 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization 7.6 The production function facing a firm is Q = 80K 0.7 L 0.3 The firm can sell all of its output for $10. The rental price of labor and capital are $7 and $12, respectively. A. Determine the optimal levels of capital and labor usage if the firm s operating budget is $25,000. B. At the optimal levels of capital and labor usage, calculate the firm s total profit. 7.7 The total revenue and total cost equations of a perfectlycompetitive firm are: TR = 30Q TC = 5525Q Q 2 A. What is the total profit function? B. Calculate the profit maximizing level of output? C. Calculate the firm s profit at the profitmaximizing output level. LONGER PROBLEMS 7.1 Suppose that the wage rate (P L ) is $35, the rental price of capital (P K ) is $75, and the firm s operating budget is $17,500. A. What is the isocost equation for the firm? B. If capital is graphed on the vertical axis, what happens to the isocost line if the wage rate falls? C. If K is measured along the vertical axis and L is measured along the horizontal axis, what happens to the isocost line if the rental price of labor rises? D. If the wage rate and the rental price of capital remain unchanged, what happens to the isocost line if the firm s operating budget decreases? E. If the firm s operating budget remains unchanged, what happens to the isocost line if the wage rate and the rental price of capital decline by the same percentage? 7.2 A firm s production function is: Q = 65L 0.5 K 0.5 where K is capital and L is labor. The prices of a unit of labor and capital and labor are $10 and $20, respectively. Suppose that the firm s operating budget is $15,000. A. Estimate the optimal levels of labor and capital usage. B. Given your answer to part A., estimate the firm s total output.
11 WSG7 7/7/03 4:36 PM Page 105 Longer Problems The total cost equation for a perfectlycompetitive firm is: TC = Q 2 A. If the firm can sell all of its output for $20 per unit, calculate the firm s profitmaximizing output level? At the profitmaximizing level of output, what is the firm s total profit. B. Suppose that the market demand equation for this product is Q = 2,50025P. If this firm was as monopoly, calculate the profitmaximizing level of output. What price should the monopolist charge? At the profitmaximizing level of output, what is the monopolist s total profit. C. What is the monopolist s totalrevenue maximizing level of output? At the totalrevenue maximizing level of output, calculate the monopolist s total profit. 7.4 The demand and total cost equations for the output of a monopolist are Q = 2005P TC = Q 38Q Q + 10 A. What is the profitmaximizing level of output? B. What is the profit at this output level? C. Determine the profitmaximizing price per unit of output. 7.5 The demand and total cost equations for the output of a monopolist are Q = 802P TC = Q 310Q Q + 2 A. What is the profitmaximizing level of output? B. What is the profit at this output level? C. Determine the profitmaximizing price per unit of output. 7.6 A firm s total profit equation is: p(x, y) = x  x 2  xy  y y where x and y represent the output levels for the two product lines. A. Determine the profitmaximizing output levels of goods x and y subject to the side condition that the sum of the two product lines equal 500 units using the Lagrange multiplier method. B. Calculate the firm s total profits. C. What is the interpretation of the Lagrange multiplier?
12 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization D. Suppose that there were no combined output requirement. What are the profit maximizing levels of x and y? E. Given your answer to part D., what is the firm s total profits? 7.1 D. 7.2 A. 7.3 B. 7.4 C. 7.5 D. 7.6 C. 7.7 A. 7.8 E. 7.9 A E B E D E B C D A A C B A D B E B C C D C. ANSWERS TO MULTIPLE CHOICE QUESTIONS
13 WSG7 7/7/03 4:36 PM Page 107 Solutions to Shorter Problems 107 SOLUTIONS TO SHORTER PROBLEMS 7.1 A. The optimal input combination is given by the expression MP L /P L = MP K /P K 60/30 = 2 < 2.5 = 125/50 Thus, the firm is not operating efficiently. B. To produce more efficiently, the firm should reallocate its budget dollars away from labor and toward towards capital. 7.2 A. The optimal input combination is given by the expression MP L /P L = MP K /P K 36/12 = 3 > 2 = 48/24 Thus, the firm is not operating efficiently. B. To produce more efficiently, the firm should reallocate its budget dollars away from capital and toward labor. 7.3 The expansion path is determined from the expression MP L /P L = MP K /P K MP L /P L = ( Q/ L)/P L = [0.25(15)K 0.65 L ]/P L MP K /P K = ( Q/ K)/P K = [0.65(15)K L 0.25 ]/P K [0.25(15)K 0.65 L ]/5 = [0.65(15)K L 0.25 ]/15 K = (13/15)L 7.4 A. MP L = Q/ L = 50 MP K = Q/ K = 25 MP L /P L = 50/12.50 = 4 MP K /P K = 25/25 = 1 Since MP L /P L > MP K /P K and the marginal products are constant, then the firm should use only labor. B. MP L /P L = 50/50 = 1 MP K /P K = 25/25 = 1 Since MP L /P L = MP K /P K and the marginal products are constant, then any combination of labor and capital that satisfy the firm s budget constraint is efficient. C. MP L /P L = 50/50 = 1 MP K /P K = 25/5 = 5 Since MP K /P K > MP L /P L and the marginal products are constant, then the firm should use only capital.
14 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization 7.5 Optimality requires that P L = P MP L. 100 = 5[(0.6)25L 0.4 K 0.6 ] = 5[15(15) 0.4 K 0.6 ] = K 0.6 K 0.6 = K = units of capital. 7.6 A. MP L /P L = MP K /P K [0.3(80)K 0.7 L 0.7 ]/7 = [0.7(80)K 0.3 L 0.3 ]/12 0.3K/7 = 0.7L/12 K = (4.9/3.6)L TC 0 = P L L + P K K 25,000 = 7L + 12L 25,000 = 7L + 12(4.9/3.6)L L* = 1, ,000 = 7(1,071.43) + 12K K* = 1, B. p=tr  TC = PQ  TC = 10(80K 0.7 L 0.3 )  25,000 10[80(1,458.33) 0.7 (1,071.43) 0.3 ]  25,000 = $1,038, A. p=tr  TC = 30Q  (5525Q Q 2 ) = Q Q 2 B. dp/dq = Q = 0, i.e., the firstorder condition for p maximization. d 2 p/dq 2 =0.04 < 0, i.e., the secondorder condition for p maximization is satisfied. Solving the firstorder condition for Q we obtain Q* = 1,375 C. p* = (1,375) (1,375) 2 = $37, SOLUTIONS TO LONGER PROBLEMS 7.1 A. TC 0 = P L L + P K K 17,500 = 35L + 75K B. K = TC 0 /P K  (P L /P K )L If the wage rate falls, the isocost line will rotate counterclockwise, i.e., the Kintercept will remain unchanged while the Lintercept moves to the left. C. If the rental price of labor rises, then the isocost line will rotate clockwise, i.e., the Kintercept will remain unchanged while the Lintercept moves to the left.
15 WSG7 7/7/03 4:36 PM Page 109 Solutions to Longer Problems 109 D. If the operating budget decreases, the isocost line will undergo a parallel shift toward the origin, i.e., the Kintercept will move down and the Lintercept will move to the left. The factor prices are unchanged, the slope of the isocost line will remain unchanged. E. If the wage rate and the rental price of capital decline by the same percentage, then the isocost line undergo a parallel shift away from the origin, i.e., the Kintercept will move up and the Lintercept will move to the right in the same proportion. The slope of the isocost line will remain unchanged. 7.2 A. The optimal combination of K and L is determined by the relation MP L /MP K = P L /P K MP L = Q/ L = 0.5(65)L 0.5 K 0.5 MP K = Q/ K = 0.5(65)L 0.5 K 0.5 [0.5(65)L 0.5 K 0.5 ]/[0.5(65)L 0.5 K 0.5 ] = 10/20 Solving for the optimal capitallabor ratio we obtain K/L = 1/2 K = 0.5L The firm s isocost equation is TC 0 = P L L + P K K 15,000 = 10L + 20K Substituting we obtain 15,000 = 10L + 20(0.5L) = 20L The optimal level of labor usage is L* = 750 The optimal level of capital usage is 15,000 = 10(750) + 20K K* = 375 B. Q* = 65(750) 0.5 (375) 0.5 = 34, A. TR = P Q = 20Q p=tr  TC = 20Q  ( Q 2 ) = Q  2.5Q 2 dp/dq = 205Q = 0, i.e., the firstorder condition for p maximization. Solving the firstorder condition for Q we obtain Q* = 4 units d 2 p/dq 2 =5 < 0, i.e., the secondorder condition for p maximization is verified. p* = (4)  2.5(4) 2 = $20
16 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization B. P = Q TR = P Q = 100Q Q 2 p=tr  TC = (100Q Q 2 )  ( Q 2 ) = Q Q 2 dp/dq = Q = 0, i.e., the firstorder condition for p maximization. Solving the firstorder condition for Q we obtain Q* = units d 2 p/dq 2 =5.08 < 0, i.e., the secondorder condition for p maximization is verified. P* = (19.69) = $99.21 p* = (19.69) (19.69) 2 = $ C. dtr/dq = Q = 0, i.e., the firstorder condition for TR maximization. Solving the firstorder condition for Q we obtain Q* = 1,250 d 2 TR/dQ 2 =0.08 < 0, i.e., the secondorder condition for TR maximization is verified. p* = (1,250) (1,250) 2 =$3,843, A. p=tr  TC P = Q TR = 40Q  0.2Q 2 p=tr  TC = (40Q  0.2Q 2 )  (Q 38Q Q + 10) =Q Q Q  10 dp/dq = 3Q Q + 15 = 0 Q 1,2 = [b ± (b 24ac)]/2a = {15.6 ± [(15.6) 24(3)(15)]}]/2(3) = [15.6 ± ( )]/6 Q 1,2 = (15.6 ± 20.58)/6 Q 1 =36.18/6 = 6.03 Q 2 = 4.98/6 = The secondorder condition for profit maximization is d 2 p/dq 2 < 0. Taking the second derivative of the profit function yields d 2 p/dq 2 =6Q Substituting the solution values into this condition we get d 2 p/dq 2 =6(6.03) = < 0, for a local maximum d 2 p/dq 2 =6(0.83) = > 0, for a local minimum Thus, total profit is maximized at Q = 6.08 units. B. p* = (6.03) (6.03) (6.03)  10 = $ C. P* = (6.03) = $38.79
17 WSG7 7/7/03 4:36 PM Page 111 Solutions to Longer Problems A. p=tr  TC P = Q TR = 40Q  0.5Q 2 p=tr  TC = (40Q  0.5Q 2 )  (Q 310Q Q + 2) =Q Q 218Q  2 dp/dq = 3Q Q  18 = 0 Q 1,2 = [b ± (b 24ac)]/2a = {19 ± [(19) 24(3)(18)]}/2(3) = (19 ± 145)/6 Q 1,2 = (19 ± 12.04)/6 Q 1 =31.04/6 = 5.17 Q 2 =6.96/6 = 1.16 The secondorder condition for profit maximization is d 2 p/dq 2 < 0. Taking the second derivative of the profit function yields d 2 p/dq 2 =6Q + 19 Substituting the solution values into this condition we get d 2 p/dq 2 =6(5.17) + 19 = < 0, for a local maximum d 2 p/dq 2 =6(1.16) + 19 = > 0, for a local minimum Thus, total profit is maximized at Q = 5.17 units. B. p* = (5.17) (5.17) 218(5.17) 2 = $20.68 C. P* = (5.17) = $ A. The formal statement of this problem is: Maximize: p(x, y) = x  x 2  xy  y y Subject to: x + y = 500 (x, y) = x  x 2  xy  y y + l(500  x  y) The firstorder conditions are: / x = 3602x  y  l=0 / y = x  2y l=0 / l = x  y = 0 This is a system of three linear equations in three unknowns. Assuming that the secondorder conditions for profit maximization are satisfied, we can solve this system of equations simultaneously to yield the optimal solution values. x* = 305 y* = 195 l* = $445 B. p* = (305)  (305) 2  (305)(195)  (195) (195) = ,80093,02559,47538, ,750 =$32,875
18 WSG7 7/7/03 4:36 PM Page Profit and Revenue Maximization C. l* = / k = p*/ k = $445 The Lagrange multiplier says that, in the limit, a reduction in the firm s combined output by 1 unit will result in a $445 increase in the firm s maximum profit. Alternatively, an increase in the firm s combined output by 1 unit will result in a $445 decrease in the firm s maximum profit. D. The firstorder conditions are: p/ x = 3602x  y = 0 p/ y = x  2y = 0 This is a system of two linear equations in two unknowns. Assuming that the secondorder conditions for profit maximization are satisfied, we can solve this system of equations simultaneously to yield the optimal solution values. x* = y* = E. p* = (156.67)  (156.67) 2  (156.67)(46.67)  (46.67) (46.67) = , , , , , = $33,133.33
Market Structure: Perfect Competition and Monopoly
WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit
More informationMarket Structure: Monopolistic Competition
WSG9 7/7/03 4:34 PM Page 131 9 Market Structure: Monopolistic Competition OVERVIEW Although the conditions necessary for the existence of perfect competitive and monopoly are unlikely to be found in the
More informationProductioin OVERVIEW. WSG5 7/7/03 4:35 PM Page 63. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.
WSG5 7/7/03 4:35 PM Page 63 5 Productioin OVERVIEW This chapter reviews the general problem of transforming productive resources in goods and services for sale in the market. A production function is the
More informationCost OVERVIEW. WSG6 7/7/03 4:36 PM Page 79. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.
WSG6 7/7/03 4:36 PM Page 79 6 Cost OVERVIEW The previous chapter reviewed the theoretical implications of the technological process whereby factors of production are efficiently transformed into goods
More informationCHAPTER 7 THE COST OF PRODUCTION
CHAPTER 7 THE COST OF PRODUCTION EXERCISES 1. Assume a computer firm s marginal costs of production are constant at $1,000 per computer. However, the fixed costs of production are equal to $10,000. a.
More informationChapter 5 The Production Process and Costs
Managerial Economics & Business Strategy Chapter 5 The Production Process and Costs McGrawHill/Irwin Copyright 2010 by the McGrawHill Companies, Inc. All rights reserved. Overview I. Production Analysis
More informationAP Microeconomics Chapter 12 Outline
I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.
More informationTable of Contents MICRO ECONOMICS
economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...
More informationLearning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to:
Learning Objectives After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Discuss three characteristics of perfectly competitive
More informationA Detailed Price Discrimination Example
A Detailed Price Discrimination Example Suppose that there are two different types of customers for a monopolist s product. Customers of type 1 have demand curves as follows. These demand curves include
More informationMarket Structure: Duopoly and Oligopoly
WSG10 7/7/03 4:24 PM Page 145 10 Market Structure: Duopoly and Oligopoly OVERVIEW An oligopoly is an industry comprising a few firms. A duopoly, which is a special case of oligopoly, is an industry consisting
More informationAn increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.
1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.
More informationLabor Demand. Labor Economics VSE Praha March 2009
Labor Demand Labor Economics VSE Praha March 2009 Labor Economics: Outline Labor Supply Labor Demand Equilibrium in Labor Market et cetera Labor Demand Model: Firms Firm s role in: Labor Market consumes
More informationPART A: For each worker, determine that worker's marginal product of labor.
ECON 3310 Homework #4  Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART
More informationNumber of Workers Number of Chairs 1 10 2 18 3 24 4 28 5 30 6 28 7 25
Intermediate Microeconomics Economics 435/735 Fall 0 Answers for Practice Problem Set, Chapters 68 Chapter 6. Suppose a chair manufacturer is producing in the short run (with its existing plant and euipment).
More informationChapter 7. Costs. C = FC + VC Marginal cost MC = C/ q Note that FC will not change, so marginal cost also means marginal variable cost.
Chapter 7. Costs Shortrun costs Longrun costs Lowering costs in the longrun 0. Economic cost and accounting cost Opportunity cost : the highest value of other alternative activities forgone. To determine
More informationLecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization
Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization 2.1. Introduction Suppose that an economic relationship can be described by a realvalued
More informationOUTPUT AND COSTS. Chapter. Decision Time Frames
Chapter 10 OUTPUT AND COSTS Decision Time Frames Topic: Short Run 1) The short run is a period of time in which A) the quantities of some resources the firm uses are fixed. B) the amount of output is fixed.
More informationUnit 5.3: Perfect Competition
Unit 5.3: Perfect Competition Michael Malcolm June 18, 2011 1 Market Structures Economists usually talk about four market structures. From most competitive to least competitive, they are: perfect competition,
More informationEconomics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013
Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on
More informationPractice Questions Week 8 Day 1
Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants
More informationMATH MODULE 5. Total, Average, and Marginal Functions. 1. Discussion M51
MATH MODULE Total, Average, and Marginal Functions 1. Discussion A very important skill for economists is the ability to relate total, average, and marginal curves. Much of standard microeconomics involves
More informationor, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:
Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.
More informationProfit Maximization. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University
Profit Maximization PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 The Nature and Behavior of Firms A firm An association of individuals Firms Who have organized themselves
More informationCHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY
CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of .0. It has a constant marginal cost of $0 per unit and sets a price to maximize
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chapter 11 Perfect Competition  Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a
More informationECON 600 Lecture 3: Profit Maximization Π = TR TC
ECON 600 Lecture 3: Profit Maximization I. The Concept of Profit Maximization Profit is defined as total revenue minus total cost. Π = TR TC (We use Π to stand for profit because we use P for something
More informationProblems on Perfect Competition & Monopoly
Problems on Perfect Competition & Monopoly 1. True and False questions. Indicate whether each of the following statements is true or false and why. (a) In longrun equilibrium, every firm in a perfectly
More informationUnit 7: Factor Markets
Unit 7: Factor Markets Factor Market Markets in which the factors of production are bought and sold. A factor input is either land, labor, capital, or entrepreneurship Entrepreneurship is not purchased
More informationPART 1: MULTIPLE CHOICE
ECN 201, Winter 1999 NAME: Prof. Bruce Blonigen SS#: MIDTERM 2  Version A Tuesday, February 23 **************************************************************************** Directions: This test is comprised
More informationNAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Midterm II April 30, 2008
NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Section I: Multiple Choice (4 points each) Identify the choice that best completes the statement or answers the question. 1.
More informationMICROECONOMICS AND POLICY ANALYSIS  U8213 Professor Rajeev H. Dehejia Class Notes  Spring 2001
MICROECONOMICS AND POLICY ANALYSIS  U8213 Professor Rajeev H. Dehejia Class Notes  Spring 2001 General Equilibrium and welfare with production Wednesday, January 24 th and Monday, January 29 th Reading:
More informationLabour is a factor of production, and labour, like other factors, such as capital (machinery, etc) are demanded by firms for production purposes.
Labour Demand Labour is a factor of production, and labour, like other factors, such as capital (machinery, etc) are demanded by firms for production purposes. The quantity of labour demanded depends on
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chapter 10  Output and Costs  Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The short run is a period of time in which A)
More information11 PERFECT COMPETITION. Chapter. Competition
Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat
More informationAgenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor
Agenda Productivity, Output, and Employment, Part 1 31 32 A production function shows how businesses transform factors of production into output of goods and services through the applications of technology.
More informationChapter 8: Theory of Cost
Chapter 8: Theory of Input s Classification Minimization Shifts in Curves Explicit and Implicit s Fixed and Variable s Profit Long Run Short Run Input Price Change New Technologies Positive Feedback Normal
More informationMERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.
MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.2011 TİIE 12:30 STUDENT NAME AND NUMBER MULTIPLE CHOICE. Choose the one
More informationChapter 10. Perfect Competition
Chapter 10 Perfect Competition Chapter Outline Goal of Profit Maximization Four Conditions for Perfect Competition Short run Condition For Profit Maximization Short run Competitive Industry Supply, Competitive
More informationECON 103, 20082 ANSWERS TO HOME WORK ASSIGNMENTS
ECON 103, 20082 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot
More informationEco 200 Group Activity 4 Key Chap 13 & 14 & 15
Eco 200 Group Activity 4 Key Chap 13 & 14 & 15 Chapter 13: 1. 4 th Edition: p. 285, Problems and Applications, Q4 3 rd Edition: p. 286, Problems and Applications, Q4 a. The following table shows the marginal
More informationChapter 13 Perfect Competition and the Supply Curve
Goldwasser AP Microeconomics Chapter 13 Perfect Competition and the Supply Curve BEFORE YOU READ THE CHAPTER Summary This chapter develops the model of perfect competition and then uses this model to discuss
More informationEconomics 10: Problem Set 3 (With Answers)
Economics 1: Problem Set 3 (With Answers) 1. Assume you own a bookstore that has the following cost and revenue information for last year:  gross revenue from sales $1,  cost of inventory 4,  wages
More information14.01 Principles of Microeconomics, Fall 2007 ChiaHui Chen October 15, 2007. Lecture 13. Cost Function
ShortRun Cost Function. Principles of Microeconomics, Fall ChiaHui Chen October, ecture Cost Functions Outline. Chap : ShortRun Cost Function. Chap : ongrun Cost Function Cost Function et w be the
More informationMPP 801 Monopoly Kevin Wainwright Study Questions
MPP 801 Monopoly Kevin Wainwright Study Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The marginal revenue facing a monopolist A) is
More informationProblem Set 5 Answers. A grocery shop is owned by Mr. Moore and has the following statement of revenues and costs:
Problem Set 5 Ansers 1. Ch 7, Problem 7. A grocery shop is oned by Mr. Moore and has the folloing statement of revenues and costs: Revenues $5, Supplies $5, Electricity $6, Employee salaries $75, Mr. Moore
More informationAP Microeconomics Review
AP Microeconomics Review 1. Firm in Perfect Competition (LongRun Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry 3. Natural Monopoly with FairReturn
More informationBUSINESS ECONOMICS CEC & 761
BUSINESS ECONOMICS CEC2 532751 & 761 PRACTICE MICROECONOMICS MULTIPLE CHOICE QUESTIONS Warning: These questions have been posted to give you an opportunity to practice with the multiple choice format
More informationShortRun Production and Costs
ShortRun Production and Costs The purpose of this section is to discuss the underlying work of firms in the shortrun the production of goods and services. Why is understanding production important to
More informationChapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS
Chapter 15: While a competitive firm is a taker, a monopoly firm is a maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The
More informationThe CobbDouglas Production Function
171 10 The CobbDouglas Production Function This chapter describes in detail the most famous of all production functions used to represent production processes both in and out of agriculture. First used
More informationMonopoly WHY MONOPOLIES ARISE
In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s wellbeing?
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MPP 801 Perfect Competition K. Wainwright Study Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Refer to Figure 91. If the price a perfectly
More informationEmployment and Pricing of Inputs
Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level
More informationECON 103, 20082 ANSWERS TO HOME WORK ASSIGNMENTS
ECON 103, 20082 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of July 14 Chapter 11 WRITE: [2] Complete the following labour demand table for a firm that is hiring labour competitively and selling its
More informationManagerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect
More informationCosts. Accounting Cost{stresses \out of pocket" expenses. Depreciation costs are based on tax laws.
Costs Accounting Cost{stresses \out of pocket" expenses. Depreciation costs are based on tax laws. Economic Cost{based on opportunity cost (the next best use of resources). 1. A selfemployed entrepreneur's
More informationI. Output Decisions by Firms
University of PacificEconomics 53 Lecture Notes #8B I. Output Decisions by Firms Now that we have examined firm costs in great detail, we can now turn to the question of how firms decide how much output
More informationEconomics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3
Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #6 Due: Wednesday, November 3 1. Cournot Duopoly. Bartels and Jaymes are two individuals who one day discover a stream
More informationPrinciples of Economics: Micro: Exam #2: Chapters 110 Page 1 of 9
Principles of Economics: Micro: Exam #2: Chapters 110 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between
More informationEconS 301 Review Session #8 Chapter 11: Monopoly and Monopsony
EconS 301 Review Session #8 Chapter 11: Monopoly and Monopsony 1. Which of the following describes a correct relation between price elasticity of demand and a monopolist s marginal revenue when inverse
More informationUNIT 6. Pricing under different market structures. Perfect Competition
UNIT 6 ricing under different market structures erfect Competition Market Structure erfect Competition ure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the
More informationProfit maximization in different market structures
Profit maximization in different market structures In the cappuccino problem as well in your team project, demand is clearly downward sloping if the store wants to sell more drink, it has to lower the
More informationANSWERS TO ENDOFCHAPTER QUESTIONS
ANSWERS TO ENDOFCHAPTER QUESTIONS 241 No firm is completely sheltered from rivals; all firms compete for the consumer dollars. Pure monopoly, therefore, does not exist. Do you agree? Explain. How might
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest
More informationDEMAND AND SUPPLY IN FACTOR MARKETS
Chapter 14 DEMAND AND SUPPLY IN FACTOR MARKETS Key Concepts Prices and Incomes in Competitive Factor Markets Factors of production (labor, capital, land, and entrepreneurship) are used to produce output.
More informationSolution to Selected Questions: CHAPTER 12 MONOPOLISTIC COMPETITION AND OLIGOPOLY
Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy 900 (Section ) Chairat Aemkulwat Economics I: Microeconomics Spring 05 Solution to Selected Questions: CHAPTER MONOPOLISTIC
More informationPreTest Chapter 25 ed17
PreTest Chapter 25 ed17 Multiple Choice Questions 1. Refer to the above graph. An increase in the quantity of labor demanded (as distinct from an increase in demand) is shown by the: A. shift from labor
More informationThe Cost of Production
The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The
More informationThe Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a
In this chapter, look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine
More informationChapter 14: Firms in Competitive Markets. Total revenue = price per unit sold number of units sold = p q
Chapter 14: Firms in Competitive Markets Profit and Revenue The firm's goal is to maximize profit. Profit = total revenue  total cost (opportunity cost) Total revenue = price per unit sold number of units
More informationSHORTRUN PRODUCTION
TRUE OR FALSE STATEMENTS SHORTRUN PRODUCTION 1. According to the law of diminishing returns, additional units of the labour input increase the total output at a constantly slower rate. 2. In the shortrun
More informationIntegrating the Input Market and the Output Market when Teaching Introductory Economics
1 Integrating the Input Market and the Output Market when Teaching Introductory Economics May 2015 Clark G. Ross Frontis Johnston Professor of Economics Davidson College Box 7022 Davidson, NC 280357022
More informationFinance 360 Problem Set #5 Solutions
Finance 360 Problem Set #5 Solutions 1) Suppose that the demand curve for video rentals has been estimated to be Q = 500 50P Further, your average costs of supplying videos is equal to AC = 8.006Q +.00000Q
More information1 st Exam. 7. Cindy's crossprice elasticity of magazine demand with respect to the price of books is
1 st Exam 1. Marginal utility measures: A) the total utility of all your consumption B) the total utility divided by the price of the good C) the increase in utility from consuming one additional unit
More informationReview of Fundamental Mathematics
Review of Fundamental Mathematics As explained in the Preface and in Chapter 1 of your textbook, managerial economics applies microeconomic theory to business decision making. The decisionmaking tools
More informationProduction Function in the LongRun. Business Economics Theory of the Firm II Production and Cost in the Long Run. Description of Technology
Business Economics Theory of the Firm II Production and Cost in the ong Run Two or more variable input factors Thomas & Maurice, Chapter 9 Herbert Stocker herbert.stocker@uibk.ac.at Institute of International
More informationChapter 7: The Costs of Production QUESTIONS FOR REVIEW
HW #7: Solutions QUESTIONS FOR REVIEW 8. Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing?
More informationReview of Production and Cost Concepts
Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #3 Review of Production and Cost Concepts Thursday  September 23, 2004 OUTLINE OF TODAY S RECITATION 1.
More informationProt Maximization and Cost Minimization
Simon Fraser University Prof. Karaivanov Department of Economics Econ 0 COST MINIMIZATION Prot Maximization and Cost Minimization Remember that the rm's problem is maximizing prots by choosing the optimal
More information8. Average product reaches a maximum when labor equals A) 100 B) 200 C) 300 D) 400
Ch. 6 1. The production function represents A) the quantity of inputs necessary to produce a given level of output. B) the various recipes for producing a given level of output. C) the minimum amounts
More informationReview. Objective: Derive firm s Supply curve
Review Objective: Derive firm s Supply curve Price 700 Eu 400 Eu Supply Review: 1. What is a production function? 2. What is the marginal product of some input? 3. What is the MRTS? 4. What are decreasing
More informationExamples on Monopoly and Third Degree Price Discrimination
1 Examples on Monopoly and Third Degree Price Discrimination This hand out contains two different parts. In the first, there are examples concerning the profit maximizing strategy for a firm with market
More informationPerfect Competition. Chapter 12
CHAPTER CHECKLIST Perfect Competition Chapter 12 1. Explain a perfectly competitive firm s profit maximizing choices and derive its supply curve. 2. Explain how output, price, and profit are determined
More informationANSWERS TO ENDOFCHAPTER QUESTIONS
ANSWERS TO ENDOFCHAPTER QUESTIONS 231 Briefly indicate the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications
More informationDescribe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly
www.edupristine.com Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly Prerequisite Characteristics of different market
More informationPreTest Chapter 21 ed17
PreTest Chapter 21 ed17 Multiple Choice Questions 1. Which of the following is not a basic characteristic of pure competition? A. considerable nonprice competition B. no barriers to the entry or exodus
More informationMicroeconomic FRQ s. Scoring guidelines and answers
Microeconomic FRQ s 2005 1. Bestmilk, a typical profitmaximizing dairy firm, is operating in a constantcost, perfectly competitive industry that is in longrun equilibrium. a. Draw correctlylabeled
More informationMonopoly and Monopsony Labor Market Behavior
Monopoly and Monopsony abor Market Behavior 1 Introduction For the purposes of this handout, let s assume that firms operate in just two markets: the market for their product where they are a seller) and
More informationc. Given your answer in part (b), what do you anticipate will happen in this market in the longrun?
Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm
More informationAP Microeconomics 2002 Scoring Guidelines
AP Microeconomics 2002 Scoring Guidelines The materials included in these files are intended for use by AP teachers for course and exam preparation in the classroom; permission for any other use must be
More informationMonopoly. Monopoly. Monopoly. Monopoly. While a competitive firm is a price taker, a monopoly firm is a price maker. Chapter 15. Why Monopolies Arise
Chapter 15 While a competitive firm is a price taker, a monopoly firm is a price maker. Copyright 21 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work
More informationChapter 14. Markets for Factor Inputs
Chapter 14 Markets for Factor Inputs Competitive Factor Markets Characteristics 1. Large number of sellers of the factor of production 2. Large number of buyers of the factor of production 3. The buyers
More informationChapter 04 Firm Production, Cost, and Revenue
Chapter 04 Firm Production, Cost, and Revenue Multiple Choice Questions 1. A key assumption about the way firms behave is that they a. Minimize costs B. Maximize profit c. Maximize market share d. Maximize
More informationChapter 16 General Equilibrium and Economic Efficiency
Chapter 16 General Equilibrium and Economic Efficiency Questions for Review 1. Why can feedback effects make a general equilibrium analysis substantially different from a partial equilibrium analysis?
More informationEconomics 165 Winter 2002 Problem Set #2
Economics 165 Winter 2002 Problem Set #2 Problem 1: Consider the monopolistic competition model. Say we are looking at sailboat producers. Each producer has fixed costs of 10 million and marginal costs
More informationUnit 7. Firm behaviour and market structure: monopoly
Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and
More informationChapter 6. Noncompetitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter
More informationPure Competition urely competitive markets are used as the benchmark to evaluate market
R. Larry Reynolds Pure Competition urely competitive markets are used as the benchmark to evaluate market P performance. It is generally believed that market structure influences the behavior and performance
More informationPricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young
Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and
More information