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- 1 The Firm and its Objectives Profit Maximization The optimality(first-order conditions What is the economic definition of profit Profit = Total

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1 The Firm and its Objectives: Profit Maximization The optimality (first-order) conditions What is the economic definition of profit? Profit = Total Revenue – Total Cost = TR – TC What is the fundamental problem for firms? The firm selects its output/production, q, to maximize profit. Note that q Q – firm output, q, is different from market output, Q. Why OUTPUT – why not say the firm selects PRICE? Firm’s have limited control over price because they face a demand curve that is determined by consumer’s preferences for their product. The variable that most certainly is under the firm’s control is its level of output/production. Derive the marginal condition for profit maximization in terms of revenue and cost. This is the firm’s first order condition (F.O.C.). Rule of thumb: if MB MC ¡Do it! For a firm MB = MR (marginal revenue) If MR > MC q If MR < MC q If MR = MC at q* (profit maximizing output). ¡MR = MC!
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2 Profit Maximization: the Demand/Revenue Side How does marginal revenue depend on elasticity of demand? Using this expression, depict the MR curve associated with a linear downward-sloping demand curve. Using this expression, depict the MR curve associated with a linear downward-sloping demand curve. P q P q D D
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3 Profit Maximization: the Cost Side How does specialization of resources lead to increasing marginal costs? How is specialization of resources reflected in diminishing returns to than input/resource? Specialization of resources leads to diminishing returns; i.e., at some point adding more of an input does not increase output as much as the previous unit of input. Refers to the effect on a firm’s output (q) when ONE
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This note was uploaded on 04/14/2008 for the course ECO 2301 taught by Professor Lubaketsler during the Spring '08 term at University of Texas at Dallas, Richardson.

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- 1 The Firm and its Objectives Profit Maximization The optimality(first-order conditions What is the economic definition of profit Profit = Total

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