Lecture 4

Lecture 4 - Chapter 12: Monopoly A. Total revenue and...

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1 Chapter 12: Monopoly A. Total revenue and marginal revenue marginal revenue = added revenue from selling one more unit B. Total cost, marginal cost and fixed cost marginal cost = added cost from producing one more unit Chapter 12: Monopoly A. Total revenue and marginal revenue B. Total cost, marginal cost and fixed cost C. Profit maximization Proposition: any firm maximizes profit by setting marginal revenue equal to marginal cost First method of proof: calculus TR ± total revenue TC ± total cost TR " TC ± profit Firm maximizes profit by finding derivative of profit with respect to Q and setting it to zero d ± TR " TC   dQ ± 0 requires d ± TR   dQ ± d ± TC   dQ or marginal revenue ± marginal cost
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2 Second method of proof: intuition Suppose the firm wasn’t following our advice, and operated at a level where MR > MC Then if it produced one more unit: • its revenues would go up by MR • its costs would go up by MC • if MR > MC, its revenues would go up by more than its costs if it produced one more unit • Conclusion: if MR > MC, firm can increase
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This note was uploaded on 03/21/2009 for the course ECON 2 taught by Professor Kim during the Spring '08 term at UCSD.

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Lecture 4 - Chapter 12: Monopoly A. Total revenue and...

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