Chapter 9 Profit Maximization


 Zoe Burns
 2 years ago
 Views:
Transcription
1 Chater 9 Profit Maximization Economic theory normally uses the rofit maximization assumtion in studying the firm just as it uses the utility maximization assumtion for the individual consumer. This aroach is taken to satisfy the need for a simle objective for the firm. This objective seems to be the most feasible.
2 The rofitmaximizing firm chooses both inuts and oututs so as to maximize the difference between total revenue and total cost. π = R() C() The firm will adjust variables under its control until it cannot increase rofit further. Thus, the firm looks at each additional unit of inut and outut with resect to its effect on rofit.
3 R() = () R and are functions of and =f(k,l). π() () C() R() C() To Maximize π : dπ dr dc Inverse demand function. Also, C is a function of and = f(k, L). FOC dr dc or MR MC Maximizing π is different from maximizing uantity () subject to a cost constraint (C=?) or minimizing C subject to a uantity constraint ( =?). Find that maximizes π and π =f(), so one variable and no constant.
4 MR=MC is the rofit maximization rule  Marginalism (MR is the change in R resulting from a small change in outut and MC is the change in C resulting from a small change in outut.) The SOC for rofit maximization is: 2 d π 2 At the otimal uantity ( ), marginal rofit must be declining; economic rofit [π()] must be a concave function of at..
5 $ C R $ + At, the sloe of C euals the sloe of R MC = MR and is at a maximum. But MC = MR at two oints; one is at maximum and the other is at minimum. Must check the SOC at. 2 d π 2. At the other MC = MR, the second derivative of is >! 
6 Let s examine marginal revenue only. dr MR() d () d, d MR = for a erfectly elastic D curve,. MR < for a downward sloing D curve, which haens when more outut can be sold only if the rice is reduced for all units sold. d so e,
7 d If then MR =. d If (downward sloing demand curve), then MR <. MR is a function of if REMEMBER: d e, MR (1 d (from a firm s demand curve ersective); therefore, d ) MR() (1 1 e, ). d and This formula is derived by multilying the second art of MR() by / and factoring out.
8 Given MR (1 1 e, ); with a negatively sloed demand curve, e, is negative and is greater than MR. Furthermore, if e, = , MR =. In summary: If: e, = , MR =.  < e, <, MR <. If: e, < 1 (demand is elastic), MR >. e, = 1 (demand is unit elastic), MR =. e, > 1 (demand is inelastic), MR <. See examle for a linear demand curve on the next slide.
9 If R = 12, then AR = = 1 and MR = 1 2. $ AR can be derived from chords to the R curve. =AR=$1 R R =AR=$5 R R When AR is declining, MR is below it. For a linear demand curve, the sloe of MR is twice the sloe of AR in absolute value. e, < 1 (elastic) MR > e, = 1 MR d=ar= MR> MR < =5 $ $ e, > 1 (inelastic) MR < =1 MR R dr The firm s demand curve is the firm s AR curve if the firm must sell all its outut at one rice.
10 Inverse Elasticity Rule Given that MC = MR at maximum for the firm and 1 MR (1 ) then e MC MC MC MC (1, 1 e e, e 1 e,,, ) This rule only makes sense if MR because if MR <, MC < at that also, and MC < is not ossible. Therefore, a rofitmaximizing firm will only oerate in the elastic ortion of its demand curve where MR >. This statement does not aly to industry demand curves.
11 As e, becomes more negative, becomes smaller, ie., the ga between and MC ( MC) becomes smaller. When e, = , MC = = MR at oint of Max. When the demand curve is negatively sloed, MR is below the demand curve (AR curve) and is greater than MC at the uantity where MC = MR. 1 MC 1 Given MR MC MC =MC at this. 1 e,, MC Economist can look at the inverse elasticity to tell how close is to MC. As aroaches MC, demand becomes more elastic. The inverse elasticity is a measure of market ower. At, 1 MC 1 > demand is downward sloing.
12 Profit Maximization by PriceTaking Firm The firm is a rice taker in the short run. 1 = SAR 1 er unit of = SAR 1 SAC 1 = 1 SAC 1. $ SAC 1 π() SC() Economic is the area of the rectangle = ( 1 SAC 1 ). FOC: FOC: dπ dπ dr SMC dsc dsc SAC=SMR=d=SAR At >, SMC > SMR so as. At <, SMC < SMR so as. Profit u to and falls beyond. SMC at must be increasing. If: () = SC() FOC: '() = SMC() = SOC: ''() = SMC'() < because ' = for ricetaker. True only if SMC'() >.
13 Pricetaking Firm s ShortRun Suly Curve Because SMC shows how much the firm will roduce at each rice, it is the firm s shortrun suly curve. Set SMC= and solve for to get shortrun suly function. The firm will move u and down the curve so SMR = SMC, maximizing SMC SAC SAVC At rices below the firm will roduce zero outut because it cannot cover SAVC. The firm will minimize losses by shutting down comletely and only losing SAFC. If it continues to oerate, it will lose all of SAFC and art of SAVC. At rices between and 2, the firm will minimize losses (max ) by continuing to oerate to cover all SAVC and art of SAFC. It loses all SAFC if it shuts down, but only art of SAFC if it oerates. At rices above 2 the firm earns an economic rofit. Thus, the shortrun suly curve is SMC above the minimum level of SAVC curve. SMC must be ositively sloed also (SOC).
14 Profit Functions Economic rofit is defined as π f(k, L) vk wl. This is not the Profit Function. The Profit Function is π f(k, L ) vk wl, or as in the text Max Max Π(, v, w) K,L π(k, L) K,L [f(k, L) vk wl]. This is maximum rofit attainable given rices. Proerties of Profit Functions 1. Homogeneous of degree 1 Inflation does not change uantities of inuts used and outut roduced, but rofit will increase at the rate of inflation. 2. Nondecreasing in outut rice, If the firm does not change inut use and outut roduced, rofit will rise as increases. If the firm changes inut use or outut in resonse to the increase in, it must be doing so to make even more rofit. Therefore, if increases, rofit remains the same or increases; it cannot decrease for a rofitmaximizing firm.
15 3. Nonincreasing in inut rices Similar to above discussion. When rofit is maximized, a firm cannot reallocate inut use without reducing rofit. If v increases and the firm cannot reallocated resources to achieve higher rofit or it would have allocated inuts differently before. 4. Convex in outut rices Average rofits obtainable from two different outut rices will be at least as high as rofit obtained from the average of two outut rices. Π(1,v,w) Π(2,v,w) 1 2 Π[ 2 2,v,w)
16 The Enveloe Theorem allows us to calculate the firm s suly function and inut demand functions by artially differentiating the Profit Function with resect to each of the rices as follows. Π(,v,w) (, v,w); the firm's suly function. Π(,v,w) K(,v,w); the negative of the firm's derived v demand function for caital (this is not contingent demand). Π(,v,w) L(,v,w); the negative of the firm's derived w demand function for labor (this is not contingent demand).
17 2 1 ShortRun Producer Surlus SMC = shortrun suly curve (Set SMC= and solve for to get B A SAVC 1 2 Shortrun roducer surlus at the revailing market rice is shortrun suly function.) The gain in shortrun roducer surlus from an increase in rice from 1 to 2 is the area above the shortrun suly curve between 1 and 2 ; the area 2 AB 1. With the rice increase, roducers gain 21 /unit of original roduction and they gain 2 ? (? is between 2 and 1 ) on increased roduction between 1 and 2. This change in roducer surlus ends u being Welfare gain (2, v, w)  (1, v, w). (1, v, w)  (, v, where is the shutdown rice at minimum SAVC. Producer surlus is the extra return the roducer makes from market transactions at the market rice over and above what he/she would earn if nothing were roduced. Finally, shortrun roducer surlus is: Π(1, v, w)  Π(, v, w) Π(1, v, w)  (vk1) 1 1 vk1 wl1 vk1 1 1 wl1, because Π(1, v, w) 1 1 vk1 wl1 and Π(, v, w) (vk1). A firm s shortrun roducer surlus is its total revenue minus its variable cost, which is what the firm gains at the market rice ( 1 ) by roducing rather than shutting down. w),
18 Profit Maximization and Inut Use Earlier we showed: π() () C() but f(k,l) and C() vk wl So, the rofitmaximizing decision is a matter of choosing otimal amounts of the inuts K and L. Max π(k, L) f(k, L) (vk wl) (Assuming a ricetaking firm in outut and inut markets. is not a function of and v and w are not functions of K and L.) π f FOC : v, K K MP v MRP K K v MP w MRP L w L π L Two variables and no constraint. f L w Define Marginal Revenue Product (MRP) as the marginal change in R for a small change in inut use. Sloe of as K and L change is. These FOCs mean that any inut should be emloyed u to the oint where its marginal contribution to revenue euals its marginal inut cost (v or w).
19 Further, divide the second FOC by the first FOC to get: f L w MP w w The sloe of isouant L or or RTSLK euals the sloe of f v MPK v v isocost line. K We get the same solution as the two constrained otimization roblems. This is the costminimizing combination of K and L for the given (otimal) outut. It is also the outut maximizing combination of K and L for the given (otimal) cost. The SOC identify this otimal combination of K and L as giving maximum rofit rather than a minimum or sadle oint. The SOC are:,, and KKLL KL. KK LL 2 If SOC are met, MC is increasing at. Diminishing MP K (f KK < ) and MP L (f LL < ) mean that KK and LL < (because KK = f KK and LL = f LL ). But diminishing MP does not ensure increasing MC with two or more inuts. The cross effects, KL and LK, which are eual, must be small enough to be dominated by the own effects to ensure that MC is increasing.
20 The FOCs for rofit maximization can be solved for the otimal combinations of K and L (K and L ) for any inut and outut rices (,v,w). Then K and L would be exressed as functions of, v, and w (for a given roduction function) to give unconditional derived inut demand functions ( is not constant). K L K(, v, w) L(, v, w) Substitute K and L into the roduction function, = f(k,l), to get otimal outut. (K,L ) (K(, v,w), L(, v,w,)) (,v, w) This is the otimized roduction function, which is the firm s suly function. This suly function shows how much will be sulied at different outut and inut rices. Is it a shortrun suly function as shown in revious grahs?
21 Inut Demand Functions K K(, v, w) L/ w always, and L L(, v, w) K/ v always. Single Inut Case: Otimality (FOC) reuires that w = (MP L ). If is fixed and w increases, MP L must increase. Because MP L is diminishing as L increases, less L must be used to cause an increase in (MP L ) to maintain euality. Thus, if w increases, L must decline for FOC to continue to hold. Mathematically: Totally differentiate L or 1 fll or w the FOC L 1 w f LL to get dw fl L L dw w The final ineuality holds because f LL is assumed to be, i.e., MP L = f L diminishes, or remains unchanged, when L increases and vice versa.
22 Two Inut Case This situation is more comlex than the single inut case because the firm would need to adjust the amount of K as well as L in resonse to a change in w. The entire MP K function moves when L changes. L MP K. When w changes, the effect on L can be decomosed into 1) the Substitution Effect and 2) the Outut Effect. Substitution Effect K K 1 A If is held constant while w decreases, there will be a substitution of L for K in the otimum inut mix. Because the minimum cost use of K and L reuires that RTS LK = w/v, a decrease in w will cause a new otimal oint at a lower RTS (less K and more L). The substitution effect will be negative. K 2 B L 1 L 2 S 1 L An increase in w will decrease L (and increase K) and a decrease in w will increase L (and decrease K). The change in L in going from A to B is the substitution effect = L 2 L 1.
23 K K 1 K 2 K3 Outut Effect for a Normal Inut The Outut Effect is negative. That is, a reduction in w will reduce MC of outut, which will cause an increase in the rofitmaximizing. A B C L 1 L 2 L 3 S 2 1 L $ 1 2 MC 1MC2 P For a normal inut, a decrease (increase) in w reduces (increases) MC, causing to increase (decrease). Looking at the isouants above, the firm moves to 2 and increases L use from L 2 to L 3, so a decrease in w causes an increase in L use. In the above case, the outut effect is negative, L/w <. If the MC curves for all firms in the industry decrease with a decrease in w, the industry suly curve (S=MC) would shift outward. This would cause P to fall and industry outut would also be higher as shown in the grah. $ P 1 P 2 MC 1 MC 2 $ S 1 Q 1 Q 2 S 2 =MC D In the firm and industry case, L/w <. Both substitution and outut effects are negative. Summary: Change in L from a decrease in w in going from A to C = total effect = L 3 L 1 euals the change in L in going from A to B = substitution effect = L 2 L 1 lus the change in L in going from B to C = outut effect = L 3 L 2.
24 K 1 K K 2 K 3 Outut Effect for an Inferior Inut A The Outut Effect is also negative. That is, a reduction in w will increase MC of outut, which will cause an decrease in the rofitmaximizing. B C L 1 L 2 L 3 Sub utut 1 L $ MC 1 MC 1 P For an inferior inut, a decrease (increase) in w increases (reduces) MC, causing to decrease (increase). Looking at the isouants above, the firm moves from 1 to and increases L use from L 2 to L 3, so a decrease in w causes an increase in L use. In the above case, the outut effect is negative, L/w <. Summary: The change in L from a decrease in w in going from A to C = total effect = L 3 L 1 euals the change in L in going from A to B = substitution effect = L 2 L 1 lus the change in L in going from B to C = outut effect = L 3 L 2. For an inferior inut, a decrease in w causes L to increase because of the substitution effect and to increase further because of the outut effect; thus, the total effect is negative.
25 CrossPrice Effects (Effect of w on K?) In the grah, the cross effect of a decrease in w is: K K 1 K 2 K 3 A B C 2 1 1) The crosssubstitution effect caused a decline in K: K Point A to oint B. K1 to K 3 w 1 2) The outut effect caused an increase in K due to : L 1 L 2 L 3 S L Point B to oint C. K to K 2 K w 3 Thus, the total effect on K of a decrease in w could be either ositive or negative deending on shae of isouants and the amount increases when w decreases ). K ( w
26 Mathematical Derivation of Substitution and Outut Effects. Begin with the FOC s for choosing K and L to maximize : v = (MP K ) and w = (MP L ). Solving these simultaneously shows that the rofitmaximizing amounts of K and L are functions of, v, and w for a given roduction function. Thus, K = K (,w,v) and L = L (,w,v). These are derived demand functions for the inuts. and either w or v are shifters of the K = f(v,w) or L = f(w,v) demand curves. We will use L as an examle and show how changes in w affect L. Remember that, at the rofitmaximizing choice of L, derived demand for L euals contingent demand for L: L(,v,w) = L c (v,w,). c c L(, v, w) L (v, w, ) L (v, w, ) Differentiate both sides to get:. w w w This says that the total effect of a change in w on demand for L has two arts: 1)the change in contingent labor demand holding constant (substitution effect), and 2) the change in contingent labor demand from a change in the level of outut (outut effect). The first term on the righthand side is negative because of strictly convex isouants.
27 The second term on the righthand side (the outut effect) is: c c L L MC ; where (MC) at P MC. w MC w MC For a normal inut, L c L MC For an inferior inut, and w so the outut effect is always negative. c MC and, w, $ 1 2 MC 1MC2 In any case, the outut effect is negative. This result along with the negative substitution effect combine to give a negative total effect on inut demand resulting from an inut rice change. L(, v,w) w always. The Giffen aradox cannot occur in the demand for inuts. P
Profit 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 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 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 informationUnit Perfect Competition Unit Overview
Unit 2.3.2  erfect competition Assumptions of the model Demand curve facing the industry and the firm in perfect competition rofitmaximizing level of output and price in the shortrun and longrun The
More informationShort Run and Long Run Supply
rofit Maximization. rinciples of Microeconomics, Fall ChiaHui Chen October, Lecture Short Run and Long Run Supply Outline. Chap : rofit Maximization. Chap : Short Run Supply. Chap : roducer Surplus. Chap
More informationMonopoly. Monopoly. Causes of Monopolies. Profit Maximization. ECON 370: Microeconomic Theory. Summer 2004 Rice University Stanley Gilbert
Monool market with a single seller Monool ECON 370: Microeconomic Theor Firm demand = market demand Firm demand is downward sloing Monoolist can alter market rice b adjusting its own outut level Summer
More informationClass 4: Monopoly and Market Power. Power to affect market price or the ability to set price above marginal cost Monopoly power and monopsony power
Class 4: Monooly and Market Power. Market ower Power to affect market rice or the ability to set rice above marginal cost Monooly ower and monosony ower An examle of monosony ower: The big3 and their
More informationPrice Elasticity of Demand MATH 104 and MATH 184 Mark Mac Lean (with assistance from Patrick Chan) 2011W
Price Elasticity of Demand MATH 104 and MATH 184 Mark Mac Lean (with assistance from Patrick Chan) 2011W The rice elasticity of demand (which is often shortened to demand elasticity) is defined to be the
More informationc 2009 Je rey A. Miron 3. Examples: Linear Demand Curves and Monopoly
Lecture 0: Monooly. c 009 Je rey A. Miron Outline. Introduction. Maximizing Pro ts. Examles: Linear Demand Curves and Monooly. The Ine ciency of Monooly. The Deadweight Loss of Monooly. Price Discrimination.
More informationChapter Three. Topics To Be Covered
Chater Three Alying the SulyandDemand Model Toics To Be Covered How the shaes of demand and suly curves matter? Sensitivity of quantity demanded to rice. Sensitivity of quantity sulied to rice. Long run
More informationHow Does A Perfectly Competitive Market Reach Long Run Equilibrium?
How Does A erfectly Competitive Market Reach Long Run Equilibrium? Sidebyside graph for perfectly completive industry and firm. Is the firm making a profit or a loss? Why? S $15 $15 MR=D AVC D 5000 Industry
More informationA Simple Model of Pricing, Markups and Market. Power Under Demand Fluctuations
A Simle Model of Pricing, Markus and Market Power Under Demand Fluctuations Stanley S. Reynolds Deartment of Economics; University of Arizona; Tucson, AZ 85721 Bart J. Wilson Economic Science Laboratory;
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 informationMonopoly vs. Compe22on. Theory of the Firm. Causes of Monopoly. Monopoly vs. Compe22on. Monopolis2c Markets P. Natural. Legal.
Monooly vs. Comeon Monooly Perfect Come,,on Theory of the Firm P Monooly s demand = Market demand (ΔQ P) P Firm s demand = Horizontal line ( Δ P does not change) Monoolisc Markets P d Q Monooly vs. Comeon
More informationprice elasticity of demand; crossprice elasticity of demand; income elasticity of demand; price elasticity of supply.
Unit 3: Elasticity In accorance with the APT rogramme the objective of the lecture is to hel You to comrehen an aly the concets of elasticity, incluing calculating: rice elasticity of eman; crossrice
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 informationc 2009 Je rey A. Miron We have seen how to derive a rm s supply curve from its MC curve.
Lecture 9: Industry Suly c 9 Je rey A. Miron Outline. Introduction. ShortRun Industry Suly. Industry Equilibrium in the Short Run. Industry Equilibrium in the Long Run. The LongRun Suly Curve. The Meaning
More informationEconomics 431 Fall 2003 2nd midterm Answer Key
Economics 431 Fall 2003 2nd midterm Answer Key 1) (20 oints) Big C cable comany has a local monooly in cable TV (good 1) and fast Internet (good 2). Assume that the marginal cost of roducing either good
More informationFirm behaviour. Profit Maximization in Competitive Markets Finding the Supply Function. Firm behaviour. Firm behaviour
rofit Maximization in Competitive Markets Finding the Supply Function Herbert Stocker herbert.stocker@uibk.ac.at Institute of International Studies University of Ramkhamhaeng & Department of Economics
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 informationUniversity of Bath DEPARTMENT OF ECONOMICS COURSEWORK TEST 1: SUGGESSTED SOLUTIONS
University of Bath DEPARTMENT OF ECONOMICS COURSEWORK TEST 1: SUGGESSTED SOLUTIONS First Year INTRODUCTORY MICROECONOMICS (ES11) 4 TH NOVEMBER 216, 17:3 18.45 (75 minutes) ANSWER ALL QUESTIONS The coursework
More informationUnit 5.4: Monopoly. Michael Malcolm. June 18, 2011
Unit 5.4: Monopoly Michael Malcolm June 18, 2011 1 Price Making A firm has a monopoly if it is the only seller of some good or service with no close substitutes. The key is that this firm has the power
More information14.01 Principles of Microeconomics, Fall 2007 ChiaHui Chen November 7, Lecture 22
Monopoly. rinciples of Microeconomics, Fall 7 ChiaHui Chen November 7, 7 Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift in Demand and Effect of Tax Monopoly The monopolist is the single supplyside
More informationImperfect Competition: Monopoly
Ierfect Coetition: Monooly New Toic: Monooly Q: What is a onooly? A onooly is a fir that faces a downward sloing deand, and has a choice about what rice to charge an increase in rice doesn t send ost or
More informationUnit 3. Elasticity Learning objectives Questions for revision: 3.1. Price elasticity of demand
Unit 3. Elasticity Learning objectives To comrehen an aly the concets of elasticity, incluing calculating: rice elasticity of eman; crossrice elasticity of eman; income elasticity of eman; rice elasticity
More informationMonopoly. Key differences between a Monopoly and Perfect Competition Perfect Competition
Monopoly Monopoly is a market structure in which one form makes up the entire supply side of the market. That is, it is the polar opposite to erfect Competition we discussed earlier. How do they come about?
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 informationMonopoly. Recall that in the previous chapter on perfect competition we also defined monopoly as follows:
I. What is a monopoly market? Monopoly Recall that in the previous chapter on perfect competition we also defined monopoly as follows: 1. Lots of buyers only one seller 2. Single firm is the market. 3.
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 informationc 2007 Je rey A. Miron 6. The Meaning of Zero Pro ts: Fixed Factors and Economic Rent
Lecture : Industr Sul. c Je re A. Miron Outline. Introduction. ShortRun Industr Sul. Industr Equilibrium in the Short Run. Industr Equilibrium in the Long Run. The LongRun Sul Curve. The Meaning of Zero
More informationWe are going to delve into some economics today. Specifically we are going to talk about production and returns to scale.
Firms and Production We are going to delve into some economics today. Secifically we are going to talk aout roduction and returns to scale. firm  an organization that converts inuts such as laor, materials,
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 informationProduction and Resource Use  Supply Side
Production and Resource Use  Supply Side Chapters, 4, and 6 Review  Where We are Going Price Supply P* Demand Q* Quantity Review  Demand Started with Utility Theory Marginal utility Consumer equilibrium
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 informationMidterm Review Questions
Midterm Review Questions July 29, 2013 Consumer Theory 1. Parvez, a pharmacology student has allocated $120 per month to spend on paperback novels (N is the number of novels) and used CDs (C is the numbers
More informationOnline Review Copy. AP Micro Chapter 8 Test. Multiple Choice Identify the choice that best completes the statement or answers the question.
AP Micro Chapter 8 Test Multiple Choice Identify the choice that best completes the statement or answers the question. 1. There would be some control over price within rather narrow limits in which market
More informationPerfect Competition and Pure Monopoly
In the Name of God Sharif University of Technology Graduate School of Management and Economics Microeconomics (for MBA students) 44111 (139394 1 st term)  Group 2 Dr. S. Farshad Fatemi Perfect Competition
More informationSample Exam According to Figure 6.1, A. Soup is a normal good C. Soup is a Giffen good B. Soup is an inferior good D. Bread is an inferior good
Sample Exam 2 1. Suppose the base year for a Lespeyres index is 2001. The value of the index is 1.3 in 2004 and 1.6 in 2006. By how much did the cost of the bundle increase between 2004 and 2006? A..3%
More informationChapter 8. Profit Maximization and Competitive Supply
Chapter 8 Profit Maximization and Competitive Supply Topics to be Discussed Perfectly Competitive Markets Profit Maximization Marginal Revenue, Marginal Cost, and Profit Maximization Choosing Output in
More informationA graphical introduction to the budget constraint and utility maximization
EC 35: ntermediate Microeconomics, Lecture 4 Economics 35: ntermediate Microeconomics Notes and Assignment Chater 4: tilit Maimization and Choice This chater discusses how consumers make consumtion decisions
More informationChapter 8. Competitive Firms and Markets
Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,
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 informationChapter 3. Special Techniques for Calculating Potentials. r ( r ' )dt ' ( ) 2
Chater 3. Secial Techniues for Calculating Potentials Given a stationary charge distribution r( r ) we can, in rincile, calculate the electric field: E ( r ) Ú Dˆ r Dr r ( r ' )dt ' 2 where Dr r 'r. This
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 informationChapter 11 Perfect Competition
Chapter 11 Perfect Competition Perfect Competition Conditions for Perfectly competitive markets Product firms are perfect substitutes (homogeneous product) Firms are price takers Reasonable with many firms,
More informationEssential Graphs for Microeconomics
Essential Graphs for Microeconomics Basic Economic Concepts roduction ossibilities Curve Good X A F B C W Concepts: oints on the curveefficient oints inside the curveinefficient oints outside the curveunattainable
More informationChapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets McGrawHill/Irwin Copyright 2010 by the McGrawHill Companies, Inc. All
More informationWhat are the conditions that lead to a perfectly competitive market?
Review: Lecture 1. Idea of constrained optimization. Definitions of economics. Role of marginal analysis. Economics as a way to explain. Also used to predict. Chapter 1 and 2. What is a market? What are
More informationChapter 12 General Equilibrium and Welfare
Chater 2 General Equilibrium and Welfare U to this oint we have dealt with onl one market at a time; Partial Equilibrium Models. ogic suggests that markets are highl interconnected. What haens in one market
More information5. Economic costs are synonymous with A) Accounting costs B) Sunk costs C) Opportunity costs D) Implicit costs
Ch. 7 1. Opportunity cost for a firm is A) Costs that involve a direct monetary outlay B) The sum of the firm's implicit costs C) The total of explicit costs that have been incurred in the past D) The
More information2013 Pearson. Why did GM fail?
Why did GM fail? Perfect Competition 15 When you have completed your study of this chapter, you will be able to CHAPTER CHECKLIST 1 Explain a perfectly competitive firm s profitmaximizing choices and
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 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 9: Perfect Competition
Chapter 9: Perfect Competition Perfect Competition Law of One Price ShortRun Equilibrium LongRun Equilibrium Maximize Profit Market Equilibrium Constant Cost Industry Increasing Cost Industry Decreasing
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 informationPrice Elasticity of Demand
rice Elasticity of Demand Demand A B The percentage change in the quantity demanded given...... a one percent change in the price. rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First
More informationEfficiency, Optimality, and Competitive Market Allocations
Efficiency, Optimality, and Competitive Market Allocations areto Efficient Allocations An allocation of resources is areto efficient if it is not possible to reallocate resources in economy to make one
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 informationMeasuring Elasticity of Demand
C H A P T E R E I G H T P r i c e e l a s t i c i t y o f d e m a n d Measuring Elasticity of Demand Demand curves can have many different shapes and so it is important to derive a way to convey their
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 informationLecture 8: Market Structure and Competitive Strategy. Managerial Economics September 11, 2014
Lecture 8: Market Structure and Competitive Strategy Managerial Economics September 11, 2014 Focus of This Lecture Examine optimal price and output decisions of managers operating in environments with
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 informationwhere a, b, c, and d are constants with a 0, and x is measured in radians. (π radians =
Introduction to Modeling 3.61 3.6 Sine and Cosine Functions The general form of a sine or cosine function is given by: f (x) = asin (bx + c) + d and f(x) = acos(bx + c) + d where a, b, c, and d are constants
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 information1 of 25 5/1/2014 4:28 PM
1 of 25 5/1/2014 4:28 PM Any point on the budget constraint Gives the consumer the highest level of utility. Represent a combination of two goods that are affordable. Represents combinations of two goods
More information25 : Perfect Competition
25 : Perfect Competition 1 Session Outline Features of Perfect Competition Demand and Revenue of a firm Short run Equilibrium Market supply and firm s supply analysis Perfect competition market is a most
More informationPrinciples of Microeconomics Review D22D29 Xingze Wang, Ying Hsuan Lin, and Frederick Jao (2007)
Principles of Microeconomics Review DD Xingze Wang, Ying Hsuan Lin, and Frederick Jao (). Principles of Microeconomics, Fall ChiaHui Chen November, Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift
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 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 informationMonopoly. Problem 1 (APT 93, P3) Sample answer:
Monopoly Problem 1 (APT 93, P3) A single airline provides service from City A to City B. a) Explain how the airline will determine the number of passengers it will carry and the price it will charge. b)
More informationTwo aspects of an elasticity are important: (1) whether it positive or negative and (2) whether it is greater than 1 or less than 1 in absolute value
Overview I. The Elasticity Concept  Own Price Elasticity  Elasticity and Total Revenue  CrossPrice Elasticity  Income Elasticity II. Demand Functions  Linear  LogLinear II. Regression Analysis
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 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 informationProfit Maximization. 2. product homogeneity
Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out
More informationChapter 8 Profit Maximization and Competitive Supply
Chapter 8 Profit Maximization and Competitive Supply Teaching Notes This chapter begins by explaining what economists mean by a competitive market and why it makes sense to assume that firms try to maximize
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 informationChapter 4. Elasticity
Chapter 4 Elasticity comparative static exercises in the supply and demand model give us the direction of changes in equilibrium prices and quantities sometimes we want to know more we want to know about
More informationOutline. Perfect CompetitionQ * 5. Intuition of Perfect Competition. Graphs of Perfect Competition. Perfect Competition 6/24/2009
Outline K. Graddy Industrial Organization Understanding ifferences Between Short Run and Long Run Elasticities Contestable t Markets Sources of Barriers to Entry First Theorem of Welfare Economics 1 Intuition
More informationProfit Maximization and the Profit Function
Profit Maximization and the Profit Function Juan Manuel Puerta September 30, 2009 Profits: Difference between the revenues a firm receives and the cost it incurs Cost should include all the relevant cost
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 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) Perfect competition occurs in a market where there are A) a few firms producing goods which differ
More informationC H A P T E R 8. Profit Maximization and Competitive Supply CHAPTER OUTLINE
C H A P T E R 8 Profit Maximization and Competitive Supply CHAPTER OUTLINE 8.1 Perfectly Competitive Markets 8.2 Profit maximization 8.3 Marginal Revenue, Marginal Cost, and Profit Maximization 8.4 Choosing
More informationProfit and Revenue Maximization
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.
More informationCase 1  Economic profits Case 2  Zero economic profit Case 3  Losses while continuing to operate Case 4  Firm closes down
TOPIC VII: PERFECT COMPETITION I. Characteristics of a Perfectly Competitive Industry II. III. The Firm as a Price Taker Short Run Decisions A. Possible profit (loss) cases for the firm Case 1  Economic
More informationChapter 6 Elasticity
Goldwasser AP Microeconomics Chapter 6 Elasticity BEFORE YOU READ THE CHAPTER Summary This chapter develops the concept of elasticity, which provides a numerical measure of the responsiveness of quantity
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 informationPERFECT COMPETITION D=AR=MR
1 RFCT CMTITIN A market said to be a perfectly competitive, when all firms regard themselves as price taker, they can sell all they wish at the going market price, and nothing at higher prices. Therefore
More informationMonopolistic Competition
Introduction to Microeconomics Monopolistic Competition Introduction In this document we refer to imperfect competition as monopolistic competition. Monopolistic competition is described as the situation
More informationUnit 2. Supply and demand
Unit 2. upply and demand Learning objectives to analyse the determinants of supply and demand and the ways in which changes in these determinants affect equilibrium price and output; in particular, to
More informationagents (believe they) cannot influence the market price agents have all relevant information What happens when neither (i) nor (ii) holds?
Information and strategic interaction Assumtions of erfect cometition: (i) (ii) agents (believe they) cannot influence the market rice agents have all relevant information What haens when neither (i) nor
More informationCBus Voltage Calculation
D E S I G N E R N O T E S CBus Voltage Calculation Designer note number: 3121256 Designer: Darren Snodgrass Contact Person: Darren Snodgrass Aroved: Date: Synosis: The guidelines used by installers
More informationECO 610: Lecture 7. Perfectly Competitive Markets
ECO 610: Lecture 7 Perfectly Competitive Markets Perfectly Competitive Markets: Outline Goal: understanding firm and market supply in competitive markets Characteristics of perfectly competitive industries
More informationMarket Definition, Elasticities and Surpluses
Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology rofessors Berndt, Chapman, Doyle, and Stoker RECITATION NOTES #1 Market Definition, Elasticities and Surpluses Friday  September
More informationChapter 6 Competitive Markets
Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a
More informationhttp://www.ualberta.ca/~mlipsett/engm541/engm541.htm
ENGM 670 & MECE 758 Modeling and Simulation of Engineering Systems (Advanced Toics) Winter 011 Lecture 9: Extra Material M.G. Lisett University of Alberta htt://www.ualberta.ca/~mlisett/engm541/engm541.htm
More informationFinance 360 Problem Set #8 Solutions
Finance 360 Problem Set #8 Solutions ) Consider the game of chicken. Two players drive their cars down the center of the road directly at each other. Each player chooses SWERVE or STAY. Staying wins you
More informationUnit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test.
Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test. 1. Which of the following items is most likely to be an implicit cost of production? a.
More informationPractice Multiple Choice Questions Answers are bolded. Explanations to come soon!!
Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications
More informationFirms production decisions
Firms production decisions What is a Competitive Market? Competitive market Perfectly or highly competitive market Market with many buyers and sellers Trading identical products Perfect information Each
More information