# 1 Economic Application of Derivatives

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 1 Economic Application of Derivatives deriv-applic.te and.pdf April 5, 2007 In earlier notes, we have already considered marginal cost as the derivative of the cost function. That is mc() = c 0 () How would you de ne, in words, the cost function and the marginal cost function? 1.1 Now let s consider total revenue, average revenue and marginal revenue Start by de ning the demand function and inverse demand function for some product. De ne the demand function for product as = (p ), where p is the price of product. The function = (p ) identi es the number of units of that will be purchased (demanded) as a function of p. Draw a demand curve with quantity on the vertical ais. Note what is on each ais. quantity d = 14 :5p :5 price 1

2 Typically when we draw demand curves on blackboards we are really drawing inverse demand functions. Now consider the inverse of the demand function p = p (). That is, price as a function of quantity. This called the inverse demand function. What is the inversen demand function corresponding to d = 14 :5p :5, Solve for p. Solution is: p = 4:0 d o 2 112:0 d + 784:0? where 4:0 d 2 112:0 d + 784:0 = 4:0 d 14:0 2 = 4:0 14 d 2 Graph it. p p = 4:0 d :0 d + 784:0 10 In words, how would you de ne the inverse demand function p = p ()? 2

3 If p = p (), de ne the total revenue function as a function of. tr = g(). Remember that total revenue is price multiplied by quantity. tr() = g() = p () Can you epress total revenue as a function of price? tr(p ) = h(p ) = p (p ) That is, one can de ne total revenue in terms of either or p. Note they have di erent functional forms, g and h. 3

4 1.1.1 Total revenue as a function of tr = g() = p () Note that average revenue per unit of product sold is total revenue, in terms of quantity, divided by quantity, so ar() = g() That is, average revenue equals price. = p () = p () Find marginal revenue in terms of, mr(). Marginal revenue is the instantaneous change in revenue. mr() = dtr() d = d(g()) d = d(p ()) d = p () + dp () d That is, the marginal revenue associated with a change in the quantity sold is the price of plus the derivative of the price wrt multiplied by. Does this make sense to you? When increases by, for eample, one unit, one takes in etra revenue from the sale of that last unit, p (), but to sell that last unit price had to decline, so revenue earned on all previous units has changed by dp() d, so the total e ect is the sum of these two separate e ects. Find mr() ar() mr() ar() = p () + dp () d p () = dp () d Can the di erence between marginal and average revenue ever be positive? Yes - but only if the demand curve slopes up. What is the di erence between marginal revenue and average revenue from the perspective of a competitive rm? From the perspective of a competitive rm p is a constant, so dp d = 0. The competitive rm can sell as much as it wants at the competitive price. So, for the competitive rm mr() ar() = dp () d = 0 Therefore, in pure competition, p = ar = mr. 4

5 What if the rm is not competitive. That is, what if from the rm s perspective dp() d < 0. To sell more the rm needs to lower its price. In this case, mr() ar() = dp () d < 0 That is, for the noncompetitive rm, p () = ar() > mr() Draw graphs and identify the vertical distance between the two curves. 5

6 Consider the following problem. 1.2 You own a movie theatre. Your costs are some constant, m, independent of the number of tickets you sell. Further assume that the inverse demand function that you face is p = p() = 15, 0 price Find your marginal revenue function and then use it to determine what ticket price you should charge to maimize your pro ts. Need to derive the total revenue function. In terms of or p? In terms of p because p is the choice variable. If p = p() = 15, (p) = 15 p. So total revenue as a function of p is tr(p) = (15 p)p = 15p p 2. Note that I could have determined total revenue as a function of rather than p but since p is the choice variable is seemed more straightforward to determine it as a function of p. So, pro t as a function of p is Note that in this case d(p) dp (p) = 15p p 2 m = dtr(p) dp = mr(p) = 15 2p 6

7 Does knowledge of the marginal revenue function help us to determine what price to set? Yes. When is mr(p) > 0, mr(p) < 0, mr(p) = 0? Find that p, p, such that mr(p ) = 0. That is, solve 15 2p = 0 for p p = 7:5 Should the movie theatre charge this price for tickets? If at the current price mr(p) > 0, the rm can increase its total revenue by increasing p. If at the current price mr(p) < 0, the rm can increase its total revenue by decreasing p. This suggest that total revenue from the theatre will be maimized when mr(p ) = 0. Will pro ts be maimized when total revenues are maimized? Is this typically the case? Will the movie theatre make a positive pro t? Yes if m < 56:25. How did you determine this? At a ticket price of \$7:50 how many tickets will be sold? 7:5 tickets. 7:5 (7:5) = 56: 25 will be total revenue. What should it do if m = \$60:00? What price should the movie theatre charge if costs are \$60:00 whenever the theatre has one or more paying patrons, and zero otherwise? A price so high that no one will buy a ticket. Demand will be zero at any price \$15:00. Why? What have we just done? We have solved for a rm s pro t maimizing price and output under two di erent assumptions about the rm s costs ( ed costs and variable costs). When we assumed costs were variable we did not assume they were very variable. What I have been doing is introducing the Theory of the Firm. You should review the chapters in your micro tet on the theory of the rm. That is, all the stu on production functions, cost functions, revenue, pro t maimization, etc. 7

8 1.2.1 Continuing with our movie theatre problem. Make the problem a little more interesting. Assume c = c() = m + 2 We want to solve for either that p or that that maimizes the movie theatre s pro ts. Will it be easier to set the problem up as one of nding or nding p? The demand function is epressed in terms of as a function of p, and the cost function is epressed as a function of. We need to epress pro ts as a function of one or the other, but not both. Let s epress total revenue as a function of, since cost is already epressed as a function of. p() = 15 So, tr() = 15 2 So pro ts, in this case, as a function of are () = 15 2 c() = 15 2 m 2 = 15 m 2 2 If, for eample, m = 5, profits What output level (and price)should the movie theatre choose to maimize its pro ts. If 0 () > 0 the rm should increase output (lower price) 0 () < 0 the rm should decrease output (increase price) This suggests that pro t s might be maimized at that,, such that 0 ( ) = 0. Find this and check to see if pro ts are maimized at this point. First determine that 0 () = 15 4 = 0 8

9 implies that = 3:75. Notice that at this level of output, mr(3:75) = mc(3:75) = 7:5 so 0 (3:75) = 0. What price would it charge to sell 3:75 tickets? Plug 3:75 into the inverse demand function to get p = \$11:25 What are the rm s pro ts, total revenues, total costs? 9

10 1.2.2 Consider a di erent movie theatre problem: Same cost function but now assume the movie theatre is a competitive rm so can sell as many tickets as it wants at the eogenous price p. Further assume the theatre is large. In this case, In this case () = p c() = p m 2 0 () = p mc() = p 2 Marginal pro ts as a function of are zero when = (p) = p=2. Is this the pro t maimizing output level? Is this the rm s supply function. Note that the supply function for a competitive rm identi es the pro t maimizing output level as a function of the eogenous competitive price. 10

### Price Discrimination: Exercises Part 1

Price Discrimination: Exercises Part 1 Sotiris Georganas Royal Holloway University of London January 2010 Problem 1 A monopolist sells in two markets. The inverse demand curve in market 1 is p 1 = 200

### 1 Maximizing pro ts when marginal costs are increasing

BEE12 Basic Mathematical Economics Week 1, Lecture Tuesda 12.1. Pro t maimization 1 Maimizing pro ts when marginal costs are increasing We consider in this section a rm in a perfectl competitive market

### Eco 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

### Competitive Firms and Markets

Competitive Firms and Markets Lecture 6 Reading: Perlo Chapter 8 August 2015 1 / 76 Introduction We learned last lecture what input combination a rm will use for a given level of output. But exactly how

1 Monopoly Why Monopolies Arise? Monopoly is a rm that is the sole seller of a product without close substitutes. The fundamental cause of monopoly is barriers to entry: A monopoly remains the only seller

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

### c 2009 Je rey A. Miron

Lecture 22: Factor Markets c 2009 Je rey A. Miron Outline 1. Introduction 2. Monopoly in the Output Market 3. Monopsony 4. Upstream and Downstream Monopolies 1 Introduction The analysis in earlier lectures

### Identify how changes in volume affect costs

Chapter 18 Identify how changes in volume affect Total variable change in direct proportion to changes in the volume of activity Unit variable cost remains constant Units produced 3 5 Total direct materials

### Economics 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

### Monopoly 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

### Utility Maximization

Utility Maimization Given the consumer's income, M, and prices, p and p y, the consumer's problem is to choose the a ordable bundle that maimizes her utility. The feasible set (budget set): total ependiture

### Sec 3.5 Business and Economics Applications. Solution step1 sketch the function. step 2 The primary equation is

Sec 3.5 Business and Economics Applications rev0216 Objectives: 1. Solve business and economics optimization problems 2. Find the price elasticity of demand for demand functions. 3. Recognize basic business

### Pure Competition Pure Monopoly Monopolistic Competition Oligopoly

Pure Competition Pure Monopoly Monopolistic Competition Oligopoly Characteristics: Rare in the real world But helps analyze industries which are similar to pure competition Many sellers means that no one

### Firms in Perfectly Competitive Markets

Chapter 11 Firms in Perfectly Competitive Markets Chapter Outline 11.1 LEARNING OBJECTIVE 11.1 Perfectly Competitive Markets Learning Objective 1 Define a perfectly competitive market, and explain why

### LECTURE #13: MICROECONOMICS CHAPTER 15

LECTURE #13: MICROECONOMICS CHAPTER 15 I. WHY MONOPOLIES ARISE A. Competitive firms are price takers; a Monopoly firm is a price maker B. Monopoly: a firm that is the sole seller of a product without close

### Microeconomics and mathematics (with answers) 5 Cost, revenue and profit

Microeconomics and mathematics (with answers) 5 Cost, revenue and profit Remarks: = uantity Costs TC = Total cost (= AC * ) AC = Average cost (= TC ) MC = Marginal cost [= (TC)'] FC = Fixed cost VC = (Total)

### AP MICROECONOMICS 2015 SCORING GUIDELINES

AP MICROECONOMICS 2015 SCORING GUIDELINES Question 1 10 points (1+5+1+3) (a) 1 point: One point is earned for stating that the firm s price is equal to the market price because the firm is a price taker.

### Econ Dept, UMR Presents. Perfect Competition-- --A Model of Markets

Econ Dept, UMR Presents Perfect Competition-- --A Model of Markets Starring The Perfectly Competitive Firm Profit Maximizing Decisions In the Short Run In the Long Run Featuring An Overview of Market Structures

### PERFECT COMPETITION STUDY UNIT 9

PERFECT COMPETITION STUDY UNIT 9 STUDY OBJECTIVES Define and indicate the characteristics of a perfectly competitive market Explain the demand curve under perfect competition Draw the demand curve for

### Unit 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 rofit-maximizing level of output and price in the short-run and long-run The

### AP 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.

### Chapter 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

### Microeconomics Instructor Miller Perfect Competition Practice Problems

Microeconomics Instructor Miller Perfect Competition Practice Problems 1. Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous

### Lecture 4: Monopoly. Daniel Zhiyun LI. September Durham University Business School (DUBS)

Lecture 4: Monopoly Daniel Zhiyun LI Durham University Business School (DUBS) September 2014 Plan of the Lecture Introduction The Problem of Monopoly Price Discriminations Introduction the other extreme

### A 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

### Monopoly. Chapter 13. Monopoly and How It Arises. Single-price Monopoly. Monopoly and Competition Compared. Price Discrimination

CHAPTER CHECKLIST Monopoly Chapter 13 1. Explain how monopoly arises and distinguish between single-price monopoly and price-discriminating monopoly. 2. Explain how a single-price monopoly determines its

### Economics 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

### MULTIPLE 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

### Pricing 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

### Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models

Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings

### 2. State whether the following statements are true or false, and explain why.

1 Chapter 9 Problems 2. State whether the following statements are true or false, and explain why. a. In a perfectly competitive industry the industry demand curve is horizontal, whereas for a monopoly

### Chapter 5 Estimating Demand Functions

Chapter 5 Estimating Demand Functions 1 Why do you need statistics and regression analysis? Ability to read market research papers Analyze your own data in a simple way Assist you in pricing and marketing

### Solution 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

### Objectives. By the time the student is finished with this section of the workbook, he/she should be able

QUADRATIC FUNCTIONS Completing the Square..95 The Quadratic Formula....99 The Discriminant... 0 Equations in Quadratic Form.. 04 The Standard Form of a Parabola...06 Working with the Standard Form of a

### Chapter 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?

### 11 PERFECT COMPETITION. Chapt er. Key Concepts. What is Perfect Competition?

Chapt er 11 PERFECT COMPETITION Key Concepts What is Perfect Competition? Perfect competition is an industry with many firms, each selling an identical good; many buyers; no restrictions on entry into

Quadratic Modeling Business 10 Profits In this activity, we are going to look at modeling business profits. We will allow q to represent the number of items manufactured and assume that all items that

### Short Run Market Equilibrium. The market supply curve is found by horizontally adding the supply curves of individual rms. If there are m rms, we have

Short Run Market Equilibrium The market supply curve is found by horizontally adding the supply curves of individual rms. If there are m rms, we have X s (p x )= mx j=1 x j (p x ): Just as we can talk

### UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on

### Measuring 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

### Chapter 8 Online Appendix: The Calculus of Long-Run Competitive Equilibria

Chapter 8 Online Appendix: The Calculus of Long-Run Competitive Equilibria The chapter presents the long-run competitive equilibrium using graphs and intuition. In this appendix, we learn how to solve

### Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

### Finance 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

### Economics 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

### The 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

### Chapter 6. Non-competitive 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

### All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

### Chapter 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

### 25 : 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

### Practice Questions Week 6 Day 1

Practice Questions Week 6 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Economists assume that the goal of the firm is to a. maximize total revenue

### THE LABOUR MARKET ECONOMY LEVEL OCCUPATION LEVEL INDIVIDUAL FIRM

THE LABOUR MARKET ECONOMY LEVEL OCCUPATION LEVEL INDIVIDUAL FIRM DEMAND FOR LABOUR IS DERIVED DEMAND Derived demand: occurs when the demand for a factor of production arises from the demand for the output

### In following this handout, sketch appropriate graphs in the space provided.

Dr. McGahagan Graphs and microeconomics You will see a remarkable number of graphs on the blackboard and in the text in this course. You will see a fair number on examinations as well, and many exam questions,

### Problems 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 long-run equilibrium, every firm in a perfectly

### Lab #11. Chapter 11 Perfect Competition

University of Lethbridge Department of Economics ECON 1010 Introduction to Microeconomics Instructor: Michael G. Lanyi Lab #11 Chapter 11 Perfect Competition 1) Perfect competition occurs in a market where

### OUTPUT 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.

### 5. The supply curve of a monopolist is A) upward sloping. B) nonexistent. C) perfectly inelastic. D) horizontal.

Chapter 12 monopoly 1. A monopoly firm is different from a competitive firm in that A) there are many substitutes for a monopolist's product but there are no substitutes for a competitive firm's product.

### EXERCISES FROM HULL S BOOK

EXERCISES FROM HULL S BOOK 1. Three put options on a stock have the same expiration date, and strike prices of \$55, \$60, and \$65. The market price are \$3, \$5, and \$8, respectively. Explain how a butter

### Our development of economic theory has two main parts, consumers and producers. We will start with the consumers.

Lecture 1: Budget Constraints c 2008 Je rey A. Miron Outline 1. Introduction 2. Two Goods are Often Enough 3. Properties of the Budget Set 4. How the Budget Line Changes 5. The Numeraire 6. Taxes, Subsidies,

### Short-Run Production and Costs

Short-Run Production and Costs The purpose of this section is to discuss the underlying work of firms in the short-run the production of goods and services. Why is understanding production important to

### Perfect 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

### MATH MODULE 5. Total, Average, and Marginal Functions. 1. Discussion M5-1

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

### 11 PERFECT COMPETITION. Chapter. Key Concepts. Perfectly Competitive Firm s Demand Curve

Chapter 11 PERFECT COMPETITION Key Concepts FIGURE 11.1 Perfectly Competitive Firm s Demand Curve Competition Perfect competition is an industry with many firms, each selling an identical good; many buyers;

### I. Output Decisions by Firms

University of Pacific-Economics 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

### Defn. Market power the abiliby of a single economic actor (or small group of actors) to have a substantial influence on market prices.

Notes for Chapter 15 Monopoly Firms in perfect competition face the most competition. (They have no market power.) Monopolies face the least competition. (They have the most market power.) Defn. Market

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

Principles of Microeconomics, Quiz #5 Fall 2007 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) Perfect competition

### ECON 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

### BUSINESS ECONOMICS CEC & 761

BUSINESS ECONOMICS CEC2 532-751 & 761 PRACTICE MICROECONOMICS MULTIPLE CHOICE QUESTIONS Warning: These questions have been posted to give you an opportunity to practice with the multiple choice format

### a. What is the marginal revenue curve of this monopolist? Take the demand curve and double the slope: MR=130-4Q

Economics 101 Spring 2011 Homework #6 Due 5/3/11 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly).

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 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

### Chapter 6 Cost-Volume-Profit Relationships

Chapter 6 Cost-Volume-Profit Relationships Solutions to Questions 6-1 The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales revenue. It can be used in a variety

### Profit 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

### CHAPTER 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

### MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition

Chapter 16 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Summary This chapter presents the traditional, idealized model of perfect competition. In it, you will

### Chapter 12. Aggregate Expenditure and Output in the Short Run

Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)

### Number 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 6-8 Chapter 6. Suppose a chair manufacturer is producing in the short run (with its existing plant and euipment).

### MULTIPLE 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)

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

### COST OF PRODUCTION & THEORY OF THE FIRM

MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM (C) positive and \$0 positive. At zero output, variable costs are zero. 2. Based on the information in the table above, the total cost of

### How Wages Are Determined in Labor Markets

ACTIVITY 4-5 How Wages Are Determined in Labor Markets This activity examines how wages and employment are determined in two types of labor s. A perfectly competitive labor is one in which all buyers and

### Intermediate Microeconomics. Chapter 13 Monopoly

Intermediate Microeconomics Chapter 13 Monopoly Non-competitive market Price maker = economic decision maker that recognizes that its quantity choice has an influence on the price at which it buys or sells

### of the linear demand curve. Show that moving to higher levels of output along the demand curve increases elasticity.

ORDINARY MONOPOLY 18. Monopoly - Overview Monopoly - A firm that sells a good where no other firm sells any good that is a close substitute for it. Unlike a competitive firm, a monopolist has some control

### CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY REVIEW QUESTIONS 1. Why would a firm that incurs losses choose to produce rather than shut down? Losses occur when revenues do not cover total costs.

### Marginal cost. Average cost. Marginal revenue 10 20 40

Economics 101 Fall 2011 Homework #6 Due: 12/13/2010 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework

### PROBLEM SET #6: PRODUCTION COSTS, PERFECT COMPETITION, MONOPOLY, PRICE DISCRIMINATION

Professor Gregory Clark ECON 1A, Fall 2000 PROBLEM SET #6: PRODUCTION COSTS, PERFECT COMPETITION, MONOPOLY, PRICE DISCRIMINATION Notes: If the total cost function of a firm has the form TC = a + bq + cq

### EXERCISE 24 SWEEZY AND CARTEL OLIGOPOLY

Sweezy and artel Oligopoly 1 EXERISE 24 SWEEZY ND RTEL OLIGOPOLY The Sweezy model, or the kinked demand model, shows that price stability can exist without collusion in an oligopoly. Two firms "squabble"

### 26 : Perfect Competition

26 : Perfect Competition 1 Recap from last Session Features of Perfect Competition Demand and Revenue of a firm Short run Equilibrium Market supply and firm s supply analysis Session Outline Market supply

### Tutorial 6 - Perfect Competition

Tutorial 6 - Perfect Competition March 2014 Problem 1 In a small, but perfectly competitive market for pineapples, there are 8 identical growers. Each grower has the following cost function: C = 2 + 2q

### Pure 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

### Oligopoly. Chapter 10. 10.1 Overview

Chapter 10 Oligopoly 10.1 Overview Oligopoly is the study of interactions between multiple rms. Because the actions of any one rm may depend on the actions of others, oligopoly is the rst topic which requires

### MPP 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

### Mod 59: Graphing Perfect Competition

Learning Targets: I Can Evaluate a perfectly competitive firm s situation using a graph. Determine a perfect competitor s profit or loss. Explain how a firm decides whether to produce or shut down in the

### Monopoly and Perfect Competition Compared

Monopoly and Perfect Competition Compared I. Definitions of Efficiency A. Technological efficiency occurs when: Given the output produced, the costs of production (recourses used) are minimized. or Given

### Profit 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

### Chapter 11. Pricing with Market Power

Chapter 11 Pricing with Market Power Topics to be Discussed(Sec. 11.1-11.4) Capturing Consumer Surplus Price Discrimination Intertemporal Price Discrimination and Peak-Load Pricing The Two-Part Tariff

### Answers to Text Questions and Problems Chapter 8

Answers to Text Questions and Problems Chapter 8 Answers to Review Questions 1. The pure monopolist, the oligopolist, and the monopolistically competitive firm all face downward-sloping demand curves.

### Employment 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